10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                              to                                             

Commission File Number:     0-27443

BAYOU CITY EXPLORATION, INC.

(Exact name of registrant as specified in its charter)

Nevada	61-1306702
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
632 Adams Street, Suite-700, Bowling Green, Kentucky	42101
(Address of principal executive offices)	(Zip Code)

(800) 798-3389

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) þ Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    þ No

Shares outstanding for each class of stock as of the latest practicable date:

Title or Class	Shares Outstanding on August 10, 2013
Common Stock, $0.005 par value	990,230

	PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
	BALANCE SHEETS AS OF JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012	1
	STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012 (UNAUDITED)	2
	STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND JUNE 30, 2012 (UNAUDITED)	3
	NOTES TO FINANCIAL STATEMENTS (UNAUDITED)	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	8
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14
ITEM 4.	CONTROLS AND PROCEDURES	14
	PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	15
ITEM 1A.	RISK FACTORS	15
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	15
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	15
ITEM 4.	MINE SAFETY DISCLOSURES	15
ITEM 5.	OTHER INFORMATION	15
ITEM 6.	EXHIBITS	16

i

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2013			December 31, 2012
	(Unaudited)			(Audited)
ASSETS:
CURRENT ASSETS:
Cash	$	1,361,611		$	2,087,480
Accounts receivable:
Trade and other		59,639			60,790
Receivable due from affiliates		523,614			104,167
Prepaid expenses and other		478,612			117,142
TOTAL CURRENT ASSETS		2,423,476			2,369,579
OIL AND GAS PROPERTIES, NET		407,405			340,053
OTHER FIXED ASSETS, NET		16,102			19,680
OTHER INVESTMENTS AT COST		126,128			126,128
INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY		36,800			150,099
INVESTMENTS HELD FOR SALE		190,000			190,000
TOTAL ASSETS	$	3,199,911		$	3,195,539
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	48,686		$	53,953
Accounts payable – minority shareholder		84,906			84,906
Turnkey partnership obligation		1,168,383			582,746
Accounts payable – related party		–			530,611
Notes payable – minority shareholder		100,000			100,000
Federal income taxes payable		–			32,697
TOTAL CURRENT LIABILITIES		1,401,975			1,384,913
TOTAL LIABILITIES		1,401,975			1,384,913
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2013 and December 31, 2012		–			–
Common stock, $0.005 par value; 150,000,000 shares authorized; 990,230 shares outstanding at June 30, 2013 and December 31, 2012		4,951			4,951
Additional paid in capital		13,912,814			13,912,814
Accumulated deficit		(12,119,829	)		(12,107,139	)
TOTAL STOCKHOLDERS' EQUITY		1,797,937			1,810,626
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,199,911		$	3,195,539

The accompanying notes are an integral part of these consolidated financial statements.

1

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
OPERATING REVENUES:
Oil and gas sales	$	75,036		$	22,626		$	183,342		$	92,194
Turnkey drilling contract revenue		215,858			–			559,726			1,578,697
TOTAL OPERATING REVENUES		290,894			22,626			743,068			1,670,891
OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes		(4,737	)		25,016			(6,721	)		44,132
Abandonment and dry hole costs		24,469			–			24,469			–
Depletion, depreciation, and amortization		28,694			5,884			60,379			33,873
Turnkey drilling contract costs		104,300			7,562			273,768			661,746
Marketing costs		11,894			179,656			58,019			254,074
General and administrative costs		244,614			188,610			392,947			326,830
TOTAL OPERATING COSTS		409,234			406,728			802,861			1,320,655
OPERATING INCOME (LOSS)		(118,340	)		(384,102	)		(59,793	)		350,236
OTHER INCOME (EXPENSE):
Miscellaneous income (expense)		200			–			10,303			–
Equity in earnings from affiliated company		8,725			80,781			36,800			80,781
NET INCOME (LOSS) BEFORE INCOME TAX PROVISION		(109,415	)		(303,321	)		(12,690	)		431,017
Income tax benefit		29,686			–			–			–
NET INCOME (LOSS)	$	(79,729	)	$	(303,321	)	$	(12,690	)	$	431,017
NET INCOME (LOSS) PER COMMON SHARE - BASIC	$	(0.08	)	$	(0.31	)	$	(0.01	)	$	0.61
NET INCOME (LOSS) PER COMMON SHARE - DILUTED	$	(0.08	)	$	(0.31	)	$	(0.01	)	$	0.61
Weighted average common shares outstanding -
Basic		990,230			990,036			990,230			704,710
Diluted		990,230			990,036			990,230			704,710

The accompanying notes are an integral part of these consolidated financial statements.

2

BAYOU CITY EXPLORATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the six months ended June 30,
	2013			2012
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss)	$	(12,690	)	$	431,017
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation, depletion, and amortization		60,379			33,873
Abandonments and dry holes		24,469			–
Equity in earnings of affiliated company		(36,800	)		–
Stock issued for services		–			22,500
Change in operating assets and liabilities:
Accounts receivable - trade		1,151			(10,477	)
Receivable from partnerships		(419,447	)		–
Prepaid expenses and other		(361,470	)		–
Accounts payable and accrued liabilities		(5,267	)		(138,420	)
Turnkey partnership obligation		585,637			183,855
Accounts payable – related party		(530,611	)		–
Federal income tax payable		(32,697	)		–
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(727,346	)		522,348
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties		(148,622	)		(4,568	)
Purchase of investments		–			(209,947	)
Cash received from unconsolidated affiliated company		150,099			–
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		1,477			(214,513	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock		–			327,500
NET CASH PROVIDED BY FINANCING ACTIVITIES		–			327,500
NET INCREASE (DECREASE) IN CASH		(725,869	)		635,335
CASH AT BEGINNING OF PERIOD		2,087,480			1,259,934
CASH AT END OF PERIOD	$	1,361,611		$	1,895,269

The accompanying notes are an integral part of these consolidated financial statements.

3

BAYOU CITY EXPLORATION, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2012 and subsequent filings with the SEC.

The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

Accounts Receivable

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of June 30, 2013, there were no accounts receivable considered potentially uncollectible.

Managed Limited Partnerships

The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of each limited partnership as its Managing General Partner, and accounts for the investment under proportionate consolidation. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively.

Consolidation Policy

The Company consolidates its interest in joint ventures and partnerships in the oil and gas industry using the “proportionate consolidation” method provided for in Accounting Standards Codification (ASC) Topic 810-10-45-14, Consolidation – Other Presentation Matters. A proportionate consolidation is permitted when the Company does not control the joint venture or partnership but nonetheless exercises significant influence.  Under this method, the Company recognizes its proportionate share of each partnership’s assets, liabilities, revenues and expenses, which are included in the appropriate classifications on the Company’s consolidated financial statements. 

All significant intercompany transactions of its consolidated subsidiary and the limited partnerships are eliminated.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

(1) the costs of acquiring mineral interest in properties,

(2) costs to drill and equip exploratory wells that find proved reserves,

4

(3) costs to drill and equip development wells, and

(4) costs for support equipment and facilities used in oil and gas producing activities.

These costs are depreciated, depleted or amortized on the unit of production method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.

The costs of drilling exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired and its costs are charged to expense. At June 30, 2013 and December 31, 2012 the Company had $0 in capitalized costs pending determination.

Other Dispositions

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

Impairment of Long-Lived Assets

The Company follows the provisions of ASC Subtopic 360-35, “Property, Plant and Equipment – Subsequent Measurement.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with ASC 932-235, “Disclosures about Oil and Gas Producing Activities.”

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statements of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

5

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At June 30, 2013, the cash balances were at $1,361,611.

Offering Related Expenses

The Company expenses marketing-related offering expenses as these are incurred. Marketing expenses totaled $58,019 and $254,074 in the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Sale of Common Stock to Related Parties

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 700,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private offering (the “Offering”) at a price of $0.005 per share, for total consideration to the Company valued at $350,000.  The Investors included Charles T. Bukowski, Jr., the Company’s former President and a former member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s President and Chief Financial Officer as well as a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder, and G2 International, Inc., a consultant to the Company. Of the $350,000, $327,500 was collected in cash and $22,500 was issued in satisfaction of payment for consulting services.

As of June 30, 2013, there were 990,230 shares of Common Stock issued and outstanding. Stephen C. Larkin, President, Director and Chief Financial Officer of the Company, beneficially owns approximately 27.06% of the issued and outstanding Common Stock as a result of his purchase in the Offering.

Payables and Notes Payable to Related Parties

As of June 30, 2013 and December 31, 2012, the Company had the following debts and obligations to related parties:

	June 30, 2013		December 31, 2012
Note Payable to a minority shareholder		100,000		100,000
Total Note Payable to a minority shareholder	$	100,000	$	100,000

During the fourth quarter 2007, Peter Chen, a minority shareholder, loaned the Company $100,000 to finance the Company’s operations. The Company executed a written promissory note on October 4, 2007 which is due on demand and bears an interest rate of 0%.

6

The Opportunity Funds and Affiliated Partners

In April 2011, the Company acquired a 25% ownership interest in Affiliated Partners, a general partnership formed for the purpose of holding an 80% interest in Loanmod, LLC, a Delaware limited liability company (“Loanmod”). Affiliated Partners is also owned by our President, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other director, Travis Creed (25%). The Company acquired its interest in Affiliated Partners in exchange for its agreement to serve as the managing member and investment manager of the Opportunity Fund VII, LLC, a Delaware limited liability company (the “Opportunity Fund VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established February 2013, both of which are also Delaware limited liability companies that invest in mortgage notes and land contracts. The purchases of mortgage notes and land contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income in connection with its acquisition of mortgage notes and land contracts for the Opportunity Funds. In the event that an Opportunity Fund acquire mortgage notes and land contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all mortgage notes and land contracts acquired from such third party.

Bonus Payment to Chief Executive Officer

In February 2013, the Company paid Stephen Larkin, its President, Chief Executive Officer and Chief Financial Officer, a bonus of $27,750 (the “2012 Bonus”). The 2012 Bonus was based upon the Company’s performance during the 2012 fiscal year.

4. OIL AND GAS PROPERTIES

Oil and Gas properties, stated at cost, consisted of the following:

	June 30, 2013			December 31, 2012
Proved oil and gas properties	$	900,693		$	776,540
Total oil and gas properties		900,693			776,540
Less accumulated depletion and amortization		(493,288	)		(436,487	)
Less impairment		–			–
Net oil and gas properties	$	407,405		$	340,053

5. COMMITMENTS AND CONTINGENCIES

Commitments

As of June 30, 2013, neither the Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

As the managing general partner of the Company’s investment partnerships, the Company’s operations are subject to environmental protection regulations established by federal, state, and local agencies that may necessitate significant capital outlays that, in turn, would materially affect the financial position and business operations of the Company. These regulations, enacted to protect against waste, conserve natural resources and prevent pollution, could necessitate spending funds on environmental protection measures, rather than on drilling operations. Because these laws and regulations change frequently and are becoming increasingly more stringent, the costs to the Company of compliance with existing and future environmental regulations and the overall impact on the Company’s operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed on the Company for violating such regulations, the Company’s operations could be adversely affected.

7

6. STOCKHOLDERS’ EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As of June 30, 2013, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as Common Stock, of which 990,230 were outstanding, and 5,000,000 shares designated as preferred stock, of which no shares were outstanding.

Issuance of Equity Securities

As described in Note 3 above, on March 8, 2012, the Company conducted a private offering pursuant to which the Company sold 700,000 shares of the Company’s Common Stock for total consideration to the Company valued at $350,000.  The consideration for the Common Stock was paid primarily in cash, however, the shares issued to one Investor were issued in exchange for settlement of outstanding invoices for consulting services rendered.

During the six months ended June 30, 2013, the Company did not issue any equity securities.

Stock Options

During the six months ended June 30, 2013, the Company did not issue any options to purchase shares of the Company’s Common Stock, and no outstanding options were exercised during this period.

Reverse Split of Common Stock

On July 26, 2012, the Company effected a 1 for 100 reverse stock split of the Company’s Common Stock, resulting in a reduction of the number of shares outstanding of the Company from approximately 99,003,633 to approximately 990,000. At June 30, 2013, the Company had 990,230 shares of Common Stock outstanding. Persons holding less than 100 shares of Common Stock received one share of Common Stock. The rights and privileges of the holders of shares of Common Stock were substantially unaffected by the reverse stock split. All issued and outstanding options, warrants and convertible securities were appropriately adjusted for the reverse stock split automatically on the effective date of the reverse stock split, and have been presented in the financial statements to adjust for the reverse stock split.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We urge you to read the following discussion in conjunction with management’s discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012 as well as with our condensed consolidated financial statements and the notes thereto included elsewhere herein.

Caution Regarding Forward-Looking Statements

Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q (this “Report”), we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance and our anticipated growth, descriptions of our strategies, and other objectives, expectations and intentions, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.

We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC or changes in costs associated with our operations. We undertake no obligation to revise or update any forward-looking statement for any reason.

8

Overview

Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated, and subsequently changed its name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name again to Bayou City Exploration, Inc. The Company’s corporate headquarters are located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101.

The Company is primarily engaged in the oil and gas exploration business, and focuses its operations in the gulf coast of Texas, east Texas, south Texas, and Louisiana. The Company also serves as the Managing Member and Investment Manager of funds organized as limited liability companies to acquire portfolios of mortgage notes and land contracts secured by real estate (the “Mortgage Notes and Land Contracts”). Nevertheless, most of our business resources are focused upon the management of partnerships created to explore and develop oil and gas reserves. We manage partnerships that purchase interests in exploratory wells and/or interests in producing oil and gas properties with undrilled reserves. Our growth strategy is based on sponsoring partnerships in which third party investors purchase an interest. These partnerships then assume the costs associated with the drilling of oil and gas wells in exchange for units in a partnership that holds a portion of the working interest derived from the wells they finance. We act as the managing general partner for these partnerships and typically maintain a 10% interest in such partnerships, but may also maintain a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project and subsequent operating expenses to the extent that we retain a portion of the working interest. We believe this strategy allows for a reduction of financial risk associated with drilling new wells, while enabling us to earn income from present production in addition to income from any successful new drilling.

When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the well(s). We then form and sell units in a partnership that will acquire working interest in the well(s) and undertake drilling operations. The Company typically enters into turnkey contracts (“Turnkey Contracts”) with each partnership it manages, pursuant to which we agree to undertake the drilling and completion of each partnership’s well(s), for a fixed price, to a specific formation or depth. As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells that the Company records as revenue.

As of June 30, 2013, the Company had total assets of $3,199,911, total liabilities of $1,401,975 and stockholders’ equity of $1,797,937. The Company had a net loss of $12,690 for the six months ended June 30, 2013 compared to a net income of $431,017 during the six months ended June 30, 2012. The net loss per common share was $0.01 per share during the six months ended June 30, 2013 as compared to net income per common share of $0.61 during the same period in 2012. All per share data in this report has been adjusted to give effect to applicable stock issuances and conversions and the Company’s 2012 reverse stock split.

All of the Company’s periodic report filings with the SEC pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101 or call (800) 798-3389.

Formation of Investment Partnerships

During the six months ended June 30, 2013, we served as the managing general partner of eight limited partnerships formed for the purpose of oil and gas exploration and drilling. The Company has entered into Turnkey Contracts with each of the partnerships pursuant to which it receives turnkey fees for drilling the partnerships’ wells and, if applicable, completing the wells (the “Turnkey Fees”).

The 2011 Bayou City Two Well Drilling Program, L.P. (the “2011 Drilling Program”) was formed in Kentucky on January 10, 2011, and planned to acquire up to a 2.125% working interest in two oil and gas wells known as the Miller Prospect Well and the Squeeze Box Prospect Well in Colorado County, Texas. The 2011 Drilling Program has acquired a 1.78% working interest in the wells. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $327,750 in Turnkey Fees associated with the 2011 Drilling Program. The Company has realized a profit of $197,253 from the Turnkey Fees received as of June 30, 2013.

The 2011 Bayou City Drilling & Production Program, L.P. (the “Drilling and Production Program”) was formed on March 18, 2011 to acquire a 2.875% working interest in the same two wells as the 2011 Drilling Program. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $529,000 in Turnkey Fees associated with the Drilling and Production Program. The Company realized a profit of $343,677 from the Turnkey Fees received as of June 30, 2013.

9

The 2011-C Bayou City Offset Drilling Program, L.P. (the “2011-C Drilling Program”) was formed in Kentucky on April 12, 2011 to acquire up to a 5% working interest in the Kleimann #1 Well, located in Colorado County, Texas. The 2011-C Drilling Program ended up only acquiring a 2.625% working interest in the Kleimann #1 well. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership well. At March 31, 2013, the Company had received $234,938 in Turnkey Fees associated with the 2011-C Drilling Program. The Company realized a profit of $137,865 from the Turnkey Fees received as of June 30, 2013.

The 2011-D Bayou City Two Well Drilling Program, L.P. (the “2011-D Drilling Program) was formed in Kentucky on May 10, 2011 to acquire a 5% working interest in the Prairie Bell West Prospect Well and the Prairie Bell East Prospect Well located in Colorado County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $949,924 in Turnkey Fees associated with the 2011-D Drilling Program. The Company realized a profit of $524,958 from the Turnkey Fees received as of June 30, 2013.

The 2011 Bayou City Year End Drilling Program, L.P. (“2011 Year End Program”) was formed in Kentucky on September 13, 2011 to acquire a 6.48% working interest in the Loma Blanca Well located in Brooks County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $1,801,500 in Turnkey Fees associated with the 2011 Year End Program. The Company realized a profit of $956,462 from the Turnkey Fees received as of June 30, 2013.

The 2012-A Bayou City Drilling Program, L.P. (“2012-A Program”) was formed in Kentucky on December 13, 2011 to acquire an 8.33% working interest in the Altair Well located in Colorado County, Texas. However, the Company made a decision and received a majority vote from the partnership to acquire interest in three different wells, the McCarthy Trust #2 with a 4.1667% working interest, the Seabreeze #1 Well with a 4.1667% working interest, and the Seabreeze #3 Well with a 0.833%, all located in Chambers County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At March 31, 2013, the Company had received $1,303,512 in Turnkey Fees associated with the 2012-A Year End Program. The Company realized a profit of $674,618 from the Turnkey Fees received as of June 30, 2013.

The 2012 Bayou City Year End Drilling Program, L.P. (“2012 Year End Program”) was formed in Kentucky on October 9, 2012 to acquire an 2.5% working interest in the Galveston Bay Well located in Galveston County, Texas. The Company paid for and holds a 1% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At June 30, 2013, the Company had received $337,121 in Turnkey Fees associated with the 2012 Year End Program. The Company realized a profit of $165,519 from the Turnkey Fees received as of June 30, 2013.

The 2013 Bayou City Seabreeze Offset Drilling Program, L.P. (“2013 Seabreeze Offset Program”) was formed in Kentucky on February 12, 2013 to acquire an 4.167% working interest in the Seabreeze #2 Well and a 3.33% working interest in the Seabreeze #3 Well, both of which are located in Chambers County, Texas. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells. At June 30, 2013, the partnership had received $1,106,039 in Turnkey Fees associated with the 2013 Seabreeze Offset Program. The Company has not realized a profit as of June 30, 2013.

The Opportunity Funds and Affiliated Partners

In April 2011, the Company acquired a 25% ownership interest in Affiliated Partners, a general partnership formed for the purpose of holding an 80% interest in Loanmod, LLC, a Delaware limited liability company (“Loanmod”). Affiliated Partners is also owned by our President, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other director, Travis Creed (25%). The Company acquired its interest in Affiliated Partners in exchange for its agreement to serve as the managing member and investment manager of the Opportunity Fund VII, LLC, a Delaware limited liability company (“Opportunity Fund VII”), which invests in Mortgage Notes and Land Contracts secured by real estate. The Company also serves as the managing member and investment manager of BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and Opportunity Fund VIII, LLC (“Opportunity Fund VIII,” and collectively with the other managed funds, “Opportunity Funds”), established in February 2013, both of which are also Delaware limited liability companies that invest in Mortgage Notes and Land Contracts. The purchases of Mortgage Notes and Land Contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income as a result in connection with its acquisition of Mortgage Notes and Land Contracts for the Opportunity Funds. In the event that the Opportunity Funds acquire Mortgage Notes and Land Contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all Mortgage Notes and Land Contracts acquired from such third party.

10

The BYCX Fund I was organized on June 28, 2011 with the objective of investing in a managed portfolio comprised of Mortgage Notes and Land Contracts secured by real estate to provide members with quarterly cash distributions. The subscription periods in which units were offered for sale in the Opportunity Funds have closed. Fund VI, BYCX Fund I and Opportunity Fund VII are participants in a “Holding Fund” called 2011-12 Opportunity Fund 6-1, LLC, which is managed by the Company and Blue Ridge Group, Inc. As of June 30, 2013, Fund VI owns approximately 46% of the Holding Fund, BYCX Fund I owns approximately 24% of the Holding Fund and Opportunity Fund VII owns approximately 30% of the Holding Fund. The Holding Fund has acquired 463 Mortgage Notes and Land Contracts with unpaid balances totaling approximately $17,108,526. The Holding Fund was capitalized with approximately $10,632,660 as of December 31, 2012. The first quarterly distributions from the Holding Fund were made in January 2012. During the six months ended June 30, 2013, approximately $800,599 was distributed to Holding Fund members.

As of June 30, 2013, Opportunity Fund VIII has a capitalization of approximately $760,000, and has invested approximately $366,000 in Mortgage Notes and Land Contracts with unpaid balances totaling approximately $366,000.

Description of Properties

The following are the primary properties held by the Company as of June 30, 2013:

Developed Properties

Rooke #2: The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in May 2010. The well produces approximately 6 barrels of oil (“Bbls”) per day as of the date of this Report.

Kleimann #1: The Company owns a 0.26% working interest in the Kleimann #1, a well located in Colorado County, Texas, which began production in March 2012. The well is currently producing approximately 228 thousand cubic feet (“Mcf”) of natural gas and 6 Bbls per day as of the date of this Report.

Squeeze Box: The Company owns a 0.78% working interest in the Squeezebox well, a gas well located in Cameron Parish, Louisiana, which began production in November 2011. The well produces approximately 171 Mcf of natural gas and 41 Bbls per day as of the date of this Report.

Prairie Bell East: The Company owns a 0.49% working interest in the Prairie Bell East well, a gas well located in Colorado County, Texas, which began production in February 2012. The well produces approximately 981 Mcf of natural gas and 23 Bbls per day as of the date of this Report.

Koehn #2: The Company owns an 11.0% working interest in the Koehn #2 well, which is located in Colorado County, Texas. The well was completed and production began as of October 2012. The well produces approximately 83 Bbls per day and 745 Mcf of natural gas as of the date of this Report.

McCarthy Trust #2: The Company owns a 0.42% working interest in the McCarthy Trust #2 Well, which is located in Chambers County, Texas. The well produces approximately 34 Bbls per day and 148 Mcf of natural gas per day as of the date of this Report.

Seabreeze #1: The Company owns a 0.42% working interest in the Seabreeze #1 Well, which is located in Chambers County, Texas. The well produces approximately 79 Bbls per day and 458 Mcf of natural gas per day as of the date of this Report.

Key Undeveloped Properties (Assets Held for Sale)

On August 29, 2011, the Company invested $190,000 and entered into the Next Energy Illinois Basin Oil & Gas Lease Development JV (“Next Energy JV”), a joint venture with Next Energy, LLC and other industry participants to evaluate, test and purchase mineral leases in the Illinois Basin. The Next Energy JV is targeting up to 300,000 net acres of oil and gas leases. The investment entitles the Company to a 0.005% interest in the Next Energy JV. The Company does not own a direct interest in any of the acreage, but rather an interest in a joint venture that holds undeveloped acreage.

11

Critical Accounting Policies

Since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, there have been no changes to the Company’s Critical Accounting Policies.

Results of Operations

Comparison of Three Month Periods Ended June 30, 2013 and June 30, 2012

The Company had a net loss of $79,729 for the three months ended June 30, 2013 compared to a net loss of $303,321 for the same period in 2012. The loss per common share was $0.08 during the first quarter of 2013 compared to a loss per common share of $0.31 during the first quarter of 2012. The change in net loss in the first quarter of 2013 was primarily the result of more Turnkey Contract revenue being recognized in 2013 than in 2012, increased revenues from oil and gas sales and a large reduction in marketing costs. These changes were offset in part by increases in abandonment and dry hole costs, general and administrative costs, depletion, depreciation, and amortization costs, and turnkey drilling contract costs. Operating expenses during the second quarter of 2013 compared to the second quarter of 2012 include a $167,762 decrease in marketing costs, a $22,810 increase in depreciation, depletion and amortization expense, an increase of $24,469 in abandonment and dry hole costs, and a $29,753 decrease in lease operating expenses and production taxes. Turnkey drilling contract costs from period to period increased $96,738, from $7,562 for the three months ended June 30, 2012 to $104,300 for the same period of 2013.

Operating Revenues

The Company’s operating revenues increased $268,268 for the three months ended June 30, 2013 compared to the same period in 2012. This significant increase was primarily a result of $215,858 in Turnkey Fees in the second quarter of 2013, compared to zero during the second quarter of 2012. Revenues from oil and gas production also increased $52,410 during the three months ended June 30, 2013 over the same period in 2012 primarily due to production from the Koehn #2 well, which produced net revenue of $84,350 during the second quarter of 2013 and was not producing during the first quarter of 2012.

Operating Costs and Expenses

The Company’s total operating costs increased $2,406 from the three months ended June 30, 2012 to the three months ended June 30, 2013. The slight increase in total operating costs was primarily due to increases of $96,738 in Turnkey Contract costs, $56,004 in general and administrative costs and $22,810 in depletion, depreciation and amortization expense from the second quarter of 2012 to the second quarter of 2013, offset by decreases of $29,753 in lease operating expenses and $167,762 in marketing costs.

Depletion, depreciation, and amortization for the three months ended June 30, 2013 were $28,864, compared to $5,884 during the three months ended June 30, 2012. These costs increased $22,810 between the periods as a result of the Koehn #2 well, in which the Company owns an 11% working interest, causing a larger than normal expense to be recognized.

Other Income

During the three months ended June 30, 2013, the Company recognized $8,725 in income from Affiliated Partners compared to $80,781 during the three months ended June 30, 2012. The income recognized during the period was the result of revenues generated by Loanmod in connection with acquisitions of Mortgage Notes and Land Contracts by the Opportunity Funds. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” to the Company’s unaudited consolidated financial statements included in this Report.

Comparison of Six Month Periods Ended June 30, 2013 and June 30, 2012

The Company had a net loss of $12,690 for the six months ended June 30, 2013 compared to a net income of $431,017 for the same period in 2012. The loss per common share was $0.01 during the first six months of 2013 compared to income per common share of $0.61 during the first six months of 2012. The change in net income in the first six months of 2013 was primarily the result of less Turnkey Contract revenue being recognized in 2013 than in 2012, offset by increases in oil and gas sales and decreases in total operating costs. Expenses from the first six months of 2012 to the first six months of 2013 included a $196,055 decrease in marketing costs, a $26,506 increase in depreciation, depletion and amortization expense, and a $50,853 decrease in lease operating expenses and production taxes. Turnkey drilling contract costs from period to period decreased $387,978, from $661,746 for the six months ended June 30, 2012 to $273,768 for the same period of 2013.

12

Operating Revenues

The Company’s operating revenues decreased $927,823 for the six months ended June 30, 2013 compared to the same period in 2012. This significant decrease was primarily a result of recognizing $1,018,971 less income from Turnkey Fees in the first six months of 2013 than the first six months of 2012. Revenues from oil and gas production also increased $91,148 between the first six months of 2012 and the same period in 2013 primarily due to production from the Koehn #2 well, which produced net revenue of $175,015 during the first six months of 2013 and was not producing during the first six months of 2012.

Operating Costs and Expenses

The Company’s total operating costs decreased $517,794 from the six months ended June 30, 2012 compared to the six months ended June 30, 2013. The decrease in total operating costs was primarily a result of $661,746 in Turnkey Contract costs in 2012 compared to $273,768 in 2013. In addition, the Company saw decreases of $50,853 in lease operating expenses and $196,055 in marketing costs during the six months ended June 30, 2013, compared to the six months ended June 30, 2012.

The Company’s decreases in operating costs and expenses were offset by an increase in depletion, depreciation, and amortization. Depletion, depreciation, and amortization for the six months ended June 30, 2013 were $60,379, compared to $33,873 during the six months ended June 30, 2012. These costs increased $26,506 during the period as a result of the Koehn #2 well, in which the Company owns an 11% working interest, causing a larger than normal expense to be recognized.

The Company’s general and administrative expenses also increased to $392,947 for the first six months 2013 as compared to $326,830 for the first six months of 2012. In addition, the Company recognized $10,303 in miscellaneous income attributable to our wholly owned subsidiary, Rivergreen Financial Group, LLC (“Rivergreen”). Planned Rivergreen operations were abandoned in 2012 and the Company had previously written off expenses associated with Rivergreen, however due to the consolidation method, the Company had to realize a gain due to an elimination entry booked during the six months ended June 30, 2013, which was not present during the first quarter of 2012.

Other Income

During the six months ended June 30, 2013, the Company recognized $36,800 in income from Affiliated Partners, compared to $80,781 during the six months ended June 30, 2012. The income recognized during the period was the result of revenues generated by Loanmod in connection with acquisitions of Mortgage Notes and Land Contracts by the Opportunity Funds. See Note 3 “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” to the Company’s unaudited consolidated financial statements included in this Report.

Balance Sheet Review

Assets: The Company’s total assets increased $4,372 from $3,195,539 at December 31, 2012 to $3,199,911 at June 30, 2013. Although cash balances at June 30, 2013 decreased $725,869 from those on hand at December 31, 2012, these decreases in current assets were offset by increases to prepaid expenses of $361,470 and increases in receivables due from affiliates of $419,447.

In addition, the Company saw a significant decrease in Investment in Unconsolidated Affiliate Company in the amount of $113,299. The drop in the asset value was due to cash paid to the Company from Affiliated Partners during the first half of 2013.

Liabilities: The Company’s total liabilities increased $17,062 from $1,384,913 at December 31, 2012 to $1,401,975 at June 30, 2013. The increase in liabilities was primarily a result of an increase of $585,637 in turnkey partnership obligation, offset by decreases of $530,611 in accounts payable – related party and $32,697 in federal income tax payable owed by the Company at June 30, 2013 as compared to December 31, 2012.

13

Liquidity and Capital Resources

The Company sponsors and serves as managing general partner of limited partnerships formed for the purpose of conducting oil and gas exploration and production operations. As a result of its formation and sponsorship of such limited partnerships, the Company receives Turnkey Fees from Turnkey Contracts in addition to revenues from oil and gas production. The Company intends to continue to sponsor such partnerships and receive revenues from similar turnkey arrangements in order to fund its operations. The Company’s ability to continue and maintain operations is contingent upon its continued ability to sponsor additional partnerships and earn Turnkey Fees. In addition, the Company believes it will continue to earn revenue from its direct oil and gas holdings, including holdings from the oil and gas limited partnerships it manages. The total production capability of the currently producing wells and their cash flows is known, and diminishing. Revenues from currently producing wells will not be sufficient to sustain the Company’s operations on a going forward basis. Based on the Company’s projected expenses, we believe our current cash resources are sufficient to fund operations for at least the next twelve months.

As of June 30, 2013, the Company’s cash balance was $1,361,611 and its liabilities totaled $1,401,975, including $1,168,383 in partnership obligations pursuant to its Turnkey Contracts with the partnerships it manages, $48,686 in accounts payable and accrued expenses, $84,906 in related party accounts payable, and $100,000 in a note payable to a minority shareholder.

Net cash used in operating activities during the six months ended June 30, 2013 was $727,346 and accounted for the Company’s $725,869 net decrease in cash during the period. The 2013 net cash used in operations was primarily due to increased receivable from partnerships of $419,447 and prepaid expenses of $361,470, decreased accounts payable-related party of 530,611 and decreased turnkey partnership obligations of $585,637. Net cash provided by investing activities was $1,477 during the six months ended June 30, 2013, due to a distribution to the Company of its portion of Affiliated Partner’s income, offset by the purchase of oil and gas properties.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective due to the inherent limitations describe below, as of the Evaluation Date, to ensure that information required to be disclosed in reports that we file or submit under that Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosures.

14

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, that occurred during the quarter ended June 30, 2013, that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention and overriding of controls and procedures. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unreported sales of unregistered securities during the quarter ended June 30, 2013.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

15

ITEM 6. EXHIBITS

The following exhibits are filed with this Quarterly Report on Form 10-Q or are incorporated by reference as described below.

Exhibit	Description
10.1	Limited Partnership Agreement of 2011-C Bayou City Offset Drilling Program, L.P. dated April 28, 2011
10.2	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011-C Bayou City Offset Drilling Program, L.P. dated April 28, 2011
10.3	Limited Partnership Agreement of 2011-D Bayou City Two Well Drilling Program, L.P. dated May 26, 2011
10.4	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2011-D Bayou City Two Well Drilling Program, L.P. dated May 26, 2011
10.5	Limited Partnership Agreement of 2012 Bayou City Year End Program., L.P. dated October 22, 2012
10.6	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012 Bayou City Year End Program., L.P. dated October 22, 2012
10.7	Limited Partnership Agreement of 2013 Bayou City Seabreeze Offset Drilling Program, L.P. dated March 8, 2013
10.8	Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2013 Bayou City Seabreeze Offset Drilling Program, L.P. dated March 8, 2013
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14a/Rule 14d-14(a).
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
101.1	Interactive data files pursuant to Rule 405 of Regulation S-T.

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 14, 2013	BAYOU CITY EXPLORATION, INC
	/s/ Stephen C. Larkin
	Stephen C. Larkin
	President and Chief Financial Officer

17

EX-10.1

Exhibit 10.1

LIMITED PARTNERSHIP

AGREEMENT

OF

2011-C Bayou City Offset Drilling Program, L.P.

1

TABLE OF CONTENTS

Section	Page
1.  The Partnership	1
1.1  Definitions	1
1.2  Organization	5
1.3  Partnership Name	5
1.4  Character of Business	5
1.5  Principal Place of Business	5
1.6  Term of Partnership	5
1.7  Filings	5
1.8  Independent Activities	6
2.  Capitalization	6
2.1  Capital Contributions of the Managing General Partner and Initial Limited Partner	6
2.2  Capital Contributions of the Partners	7
2.3  Additional Capital Contributions	7
2.4  No Interest on Capital Contributions, No Withdrawals	7
3.  Capital Accounts and Allocations	7
3.1  Capital Accounts	7
3.2  Allocation of Profits and Losses and Costs and Expenses	9
3.3  Depletion	10
3.4  Apportionment Among Partners	11
4.  Distributions	11
4.1  Time of Distribution	11
4.2  Distributions	11
4.3  Capital Account Deficits	11
5.  Activities	11
5.1  Management	11
5.2  Conduct of Operations	12
5.3  Acquisition and Sale of Leases	12
5.4  Title to Leases	13
5.5  Release, Abandonment, and Sale or Exchange of Properties	13
5.6  Certain Transactions With Managing General Partner or Affiliates	13
6.  Managing General Partner	13
6.1  Managing General Partner	13
6.2  Authority of Managing General Partner	13
6.3  Certain Restrictions on Managing General Partner's Power and Authority	14
6.4  Indemnification of Managing General Partner	15
6.5  Withdrawal	16
6.6  Tax Matters Partner	16

ii

TABLE OF CONTENTS

Section	Page
7.  Partners	16
7.1  Management	16
7.2  Assignment of Units	16
7.3  Prohibited Transfers	17
7.4  Withdrawal by Partners	18
7.5  Calling of Meetings	18
7.6  Voting Rights	18
7.7  Voting by Proxy	18
7.8  Conversion of Additional General Partner Units to Limited Partner Interests	18
7.9  Liability of Partners	19
8.  Books and Records	19
8.1  Books and Records	19
8.2  Reports	19
8.3  Bank Accounts	19
8.4  Federal Income Tax Elections	20
9.  Dissolution; Winding-Up	20
9.1  Dissolution	20
9.2  Liquidation	20
9.3  Winding-Up	21
10.  Power of Attorney	21
10.1  Managing General Partner as Attorney-in-Fact	21
10.2  Nature as Special Power	22
11.  Miscellaneous Provisions	22
11.1  Liability of Parties	22
11.2  Notices	22
11.3  Paragraph Headings, Section References	23
11.4  Severability	23
11.5  Sole Agreement	23
11.6  Applicable Law	23
11.7  Execution in Counterparts	23
11.8  Waiver of Action for Partition	23
11.9  Amendments	23
11.10  Substitution of Signature Pages	24
11.11  Incorporation by Reference	24

iii

LIMITED PARTNERSHIP AGREEMENT

OF

2011-C Bayou City Offset Drilling Program, L.P.

This Limited Partnership Agreement (“Agreement”) is entered into and effective as of the 28^th day of April 2011, by and between (i) Bayou City Exploration, Inc., a Nevada corporation, as the Managing General Partner and (ii) the Persons whose names are set forth on Exhibit A attached hereto, as Additional General Partners or as Limited Partners.

Recitals:

A. The Managing General Partner and the Initial Limited Partner formed a Kentucky limited partnership named 2011-C Bayou City Offset Drilling Program, L.P. (“Partnership”) pursuant to the provisions of the Kentucky Revised Uniform Limited Partnership Act.

B. On the date hereof, the Additional General Partners and Limited Partners have been admitted to the Partnership.

C. The parties desire to enter into this Agreement to set forth their mutual understandings.

Agreement:

Now, Therefore, the parties hereby agree as follows:

1. The Partnership.

1.1 Definitions. Capitalized words and phrases used in this Agreement shall have the following meanings:

(a) “Act” shall mean the Kentucky Revised Uniform Limited Partnership Act, as amended from time to time (or any corresponding provisions of succeeding law).

(b) “Additional General Partner” shall mean a Partner who purchases Units as an additional general partner, and such Additional General Partner’s transferees and assigns who are admitted as a Substitute Partner. The term “Additional General Partners” shall not include such Partner who converts such Partner’s interest in the Partnership into a Limited Partner interest pursuant to Section 7.8.

(c) “Affiliate” of a specified Person shall mean (a) any Person directly or indirectly owing, controlling, or holding with power to vote 10% or more of the outstanding voting securities of such specified Person; (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; (d) any officer, director, trustee or partner of such specified Person, and (e) if such specified Person is an officer, director, trustee or partner, any Person for which such Person acts in any such capacity.

(d) “Agreement” shall mean this Limited Partnership Agreement, as amended from time to time.

(e) “Capital Account” shall mean, with respect to any Partner, the capital account maintained for such Partner pursuant to Section 3.1.

(f) “Capital Contribution” shall mean the total contributions made by a Partner to the capital of the Partnership pursuant to Section 2.

1

(g) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law).

(h) “Depreciation” shall mean, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for Federal income tax purposes, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the Federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the Federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner.

(i) “Distributable Cash” shall mean for any period the excess, if any, of (A) the sum of (i) all gross receipts from any sources (including loan proceeds) for such period, other than from Capital Contributions, plus (ii) any funds released by the Managing General Partner from previously established reserves (referred to in (B)(ii) below), over (B) the sum of (i) all cash expenditures of the Partnership for such period not funded by Capital Contributions or paid out of previously established reserves (referred to in (B)(ii) below), plus (ii) a reasonable reserve for future expenditures as determined by the Managing General Partner.

(j) “General Partners” shall mean the Additional General Partners and the Managing General Partner.

(k) “Gross Asset Value” shall mean, with respect to any asset, the asset’s adjusted basis for Federal income tax purposes, except as follows:

(1) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership;

(2) The Gross Asset Value of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership of property in consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the Managing General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(3) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and

(4) The Gross Asset Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section 3.2(g); provided, however, that Gross Asset Value shall not be adjusted pursuant to this Section 1.1(k)(4) to the extent the Managing General Partner determines that an adjustment pursuant to Section 1.1(k)(2) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.1(k)(4).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Sections 1.1(k)(1), 1.1(k)(2), or 1.1(k)(4), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

(l) “Initial Limited Partner” shall mean Stephen C. Larkin or any successor to the Initial Limited Partner’s interest in the Partnership.

2

(m) “Lease” shall mean full or partial interests in: (i) undeveloped oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner thereof to drill for, reduce to possession, and produce oil and gas.

(n) “Limited Partner” shall mean a Partner who purchases Units as a Limited Partner, such Limited Partner’s transferee or assignee who is admitted as a Substitute Partner, and an Additional General Partner who converts their interest to a Limited Partner interest pursuant to the provisions of this Agreement.

(o) [Intentionally omitted]

(p) “Managing General Partner” shall mean Bayou City Exploration, Inc. or its successor, in its capacity as the Managing General Partner.

(q) “Nonrecourse Liability” shall have the meaning set forth in Treas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).

(r) “Oil and Gas Interest” shall mean any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to such royalties, leases, or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of such production or the proceeds thereof.

(s) “Operating Costs” shall mean expenditures made and costs incurred in producing and marketing oil or gas from the completed well, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges, and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations.

(t) “Organization and Offering Fee” shall mean the fee to which the Managing General Partner is entitled pursuant to Section 6.7.

(u) “Participant List” shall mean an alphabetical list of the names, addresses and business telephone numbers of the Partners, along with the number of Units held by each of them.

(v) “Partner Minimum Gain” shall mean partner nonrecourse debt minimum gain within the meaning of Treas. Reg. Section 1.704-2(i)(3).

(w) “Partner Nonrecourse Debt” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(4).

(x) “Partner Nonrecourse Deductions” shall have the meaning set forth in Treas. Reg. Section 1.704-2(i)(2).

(y) “Partners” shall mean the Managing General Partner, the Initial Limited Partner, and the Partners.

(z) “Partner” shall mean any Person other than the Managing General Partner and Initial Limited Partner (i) whose name is set forth on Exhibit A attached hereto as an Additional General Partner or as a Limited Partner, or who has been admitted as an additional or Substitute Partner pursuant to the terms of this Agreement, and (ii) who is the owner of one or more Units.

(aa) “Partnership” shall mean the 2011-C Bayou City Offset Drilling Program, L.P. formed by the Partners pursuant to the Act and governed by this Agreement.

(bb) “Partnership Minimum Gain” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(2).

(cc) “Partnership Property” shall mean up to 5% Working Interest, which is approximately 3.75% of the Net Revenue Interest in one offset well to be drilled on the Glasscock Ranch Prospect (the “Kleimann #1 Well”). The Glasscock Ranch Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands and the Stratigraphic Lower Wilcox formations.

3

(dd) “Partnership Well” shall mean the Partnership well site on the Partnership Property which consists of oil and gas leases in Colorado County, Texas.

(ee) “Permitted Transfer” shall mean any transfer of Units satisfying the provisions of Section 7.2.

(ff) “Person” shall mean any individual, partnership, corporation, limited liability company, trust, or other entity.

(gg) “Placement Memorandum” shall mean that Private Placement Memorandum pursuant to which the Units are being offered and sold.

(hh) “Profits” and “Losses” shall mean, for each fiscal year or other period, an amount equal to the Partnership’s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(1) Any income of the Partnership that is exempt from Federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be added to such taxable income or loss;

(2) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be subtracted from such taxable income or loss;

(3) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Sections 1.1(k)(2) or 1.1(k)(4), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purpose of computing Profits or Losses;

(4) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.1(h); and

(6) Notwithstanding any other provisions of this Section 1.1(hh), any items which are specially allocated pursuant to this Agreement shall not be taken into account in computing Profits or Losses.

(ii) “Prospect” shall mean a contiguous Oil and Gas Interest, upon which drilling operations may be conducted. In general, a Prospect is an area in which the Partnership owns or intends to own one or more Oil and Gas Interests which is geographically defined on the basis of geological and geophysical data by the Managing General Partner and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A “prospect” with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a horizon containing proved reserves.

4

(jj) “Subscription Agreement” shall mean the agreement attached to the Placement Memorandum as Exhibit D, pursuant to which an investor subscribes to Units in the Partnership.

(kk) “Substitute Partner” shall mean any Person admitted to the Partnership as a Partner pursuant to Section 7.2(c).

(ll) “TMP” shall mean the tax matters partner of the Partnership for purposes of Code Sections 6621 through 6233.

(mm) “Unit” shall mean an interest of a Partner in the Partnership, each Unit representing a commitment to make a Capital Contribution of up to $44,750 to the Partnership.

(nn) “Working Interest” shall mean an interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance.

1.2 Organization. The Managing General Partner and the Initial Limited Partner formed the Partnership pursuant to the provisions of the Act. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement.

1.3 Partnership Name. The name of the Partnership shall be the “2011-C Bayou City Offset Drilling Program, L.P.” and all business of the Partnership shall be conducted in such name. The Managing General Partner may change the name of the Partnership upon ten days notice to the Partners.

1.4 Character of Business. The principal business of the Partnership shall be to acquire leases, drill sites, and other interests in oil and/or gas properties and to drill for oil, gas, hydrocarbons, and other minerals located in, on, or under such properties, to produce and sell oil, gas, hydrocarbons, and other minerals from such properties, and to invest and generally engage in any and all phases of the oil and gas business. Such business purpose shall include, without limitation, the purchase, sale, acquisition, disposition, exploration, development, operation, and production of oil and gas properties of any character. Without limiting the foregoing, Partnership activities may be undertaken as principal, agent, general partner, syndicate member, partner, participant, or otherwise.

1.5 Principal Place of Business. The principal place of business of the Partnership shall be at 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101. The Managing General Partner may change the principal place of business of the Partnership to any other place within the Commonwealth of Kentucky upon ten days notice to the Partners.

1.6 Term of Partnership. The Partnership commenced upon the filing of its Certificate of Limited Partnership, and shall continue until terminated as provided in Section 9.1.

1.7 Filings.

(a) A Certificate of Limited Partnership has been filed with the State of Kentucky in accordance with the provisions of the Act. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of Kentucky. The Managing General Partner shall cause amendments to the Certificate of Limited Partnership to be filed whenever required by the Act.

5

(b) The Managing General Partner shall execute and cause to be filed all such documents and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership qualified to do business in any other states or jurisdictions in which the Partnership engages in business.

(c) Upon the dissolution of the Partnership, the Managing General Partner shall promptly execute and cause to be filed a Certificate of Cancellation in accordance with the Act and all such other documents as may be necessary for the Partnership to withdraw from any other states or jurisdictions in which the Partnership has qualified to do business.

1.8 Independent Activities. Each General Partner and each Limited Partner may, notwithstanding this Agreement, engage in whatever activities they choose, whether the same are competitive with the Partnership or otherwise, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner. Except as otherwise provided herein, however, the Managing General Partner and its Affiliates may pursue business opportunities that are consistent with the Partnership’s investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Neither this Agreement, nor any activity undertaken pursuant hereto, shall prevent the Managing General Partner from engaging in such activities, or require the Managing General Partner to permit the Partnership or any Partner to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by the Managing General Partner and the admission of each Partner, each Partner hereby waives, relinquishes, and renounces any such right or claim of participation. Notwithstanding the foregoing, the Managing General Partner still has a fiduciary obligation to the Partners.

2. Capitalization.

2.1 Capital Contributions of the Managing General Partner and Initial Limited Partner.

(a) The Managing General Partner shall make a Capital Contribution in cash to the Partnership of an amount equal to 10% of the aggregate Capital Contributions of the Partners. In consideration of making such Capital Contribution, becoming the Managing General Partner, subjecting its assets to the liabilities of the Partnership, and undertaking other obligations as herein set forth, the Managing General Partner shall receive the interest in the Partnership provided herein.

(b) On or before the date hereof, the Initial Limited Partner shall contribute $100 in cash to the capital of the Partnership. Upon the earlier to occur of (i) the conversion of an Additional General Partner’s interest into a Limited Partner interest, or (ii) the admission of another Limited Partner to the Partnership, the Partnership shall redeem in full, without interest or deduction, the Initial Limited Partner’s Capital Contribution, and the Initial Limited Partner shall cease to be a Partner.

2.2 Capital Contributions of the Partners.

(a) The interests of the Partners (other than the Managing General Partner) have been divided into 10 units (“Units”) for which each such Partner shall commit to contribute Forty-Four Thousand Seven Hundred Fifty Dollars ($44,750) per full Unit. Upon execution of this Agreement, each initial Partner (whose names and addresses and number of Units for which the Partner has subscribed are set forth in Exhibit A) shall contribute to the capital of the Partnership the sum of $30,000 for each full Unit purchased. In the event that the Managing General Partner determines, in its sole discretion, that completion of the Glasscock Ranch Prospect Well (as defined in the Placement Memorandum) is advisable, each initial Partner shall contribute to the capital of the Partnership the additional sum of $14,750 for the for each full Unit purchased. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay the additional Capital Contribution required to be made by such Partner within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

6

(b) Except as provided in Section 4.3, any proceeds of the offering of Units for sale pursuant to the Placement Memorandum not used, committed for use, or reserved as operating capital in the Partnership’s operations within one year after the closing of such offering shall be distributed pro rata to the Partners as a return of capital.

(c) Until proceeds from the offering of Units are invested in the Partnership’s operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments where there is appropriate safety of principal, such as U.S. Treasury obligations, certificate of deposits or money market accounts. Any such income shall be allocated pro rata to the Partners providing such Capital Contributions.

2.3 Additional Capital Contributions. After all Capital Contributions made pursuant to Sections 2.1 and 2.2 have been expended, if the Managing General Partner determines that additional capital is required for the Partnership’s business, the Managing General Partner shall give notice thereof to each of the Partners, and each of the Partners shall be obligated to make an additional Capital Contribution pro rata in accordance with the Capital Contributions previously made by each of them. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay an additional Capital Contribution required to be made by such Partner or that portion of the amount required to be contributed by the Partners pursuant to Sections 2.1 and 2.2 within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

2.4 No Interest on Capital Contributions, No Withdrawals. No interest shall be paid on any Capital Contributions and, except as otherwise provided herein, no Partner, other than the Initial Limited Partner as authorized herein, may withdraw the Partner’s Capital Contribution.

3. Capital Accounts and Allocations.

3.1 Capital Accounts.

(a) A separate Capital Account shall be established and maintained for each Partner on the books and records of the Partnership. A Partner shall have a single Capital Account even though the Partner may be both a General Partner and a Limited Partner. Capital Accounts shall be maintained in accordance with Treas. Reg. Section 1.704-1(b) and any inconsistency between the provisions of this Section 3.1 and such regulation shall be resolved in favor of such regulation. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with such regulation, the Managing General Partner may make such modification provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 9.3 upon the dissolution of the Partnership. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treas. Reg. Section 1.704-1(b).

7

(b) Each Partner’s Capital Account shall be credited with (i) the amount of money contributed by such Partner to the Partnership; (ii) the amount of any Partnership liabilities that are assumed by such Partner (within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)); (iii) the Gross Asset Value of property contributed by such Partner to the Partnership (net of liabilities secured by such contributed property that the Partnership is considered to assume or take subject to under Code Section 752); and (iv) allocations to such Partner of Profits (or items thereof), including income and gain exempt from tax and income and gain described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value).

(c) Each Partner’s Capital Account shall be debited with (i) the amount of money distributed to such Partner by the Partnership; (ii) the amount of such Partner’s individual liabilities that are assumed by the Partnership (other than liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership); (iii) the Gross Asset Value of property distributed to such Partner by the Partnership (net of liabilities secured by such distributed property that such Partner is considered to assume or take subject to under Code Section 752); (iv) allocations to such Partner of expenditures of the Partnership not deductible in computing Partnership taxable income and not properly chargeable to capital account (as described in Code Section 705(a)(2)(B)), and (v) allocations to such Partner of Losses (or item thereof), including Losses and deductions described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but excluding items described in (iv) above and excluding Losses or deductions described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to excess percentage depletion).

(d) Solely for purposes of maintaining the Capital Accounts:

(1) Each year the Partnership shall compute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each Oil and Gas Interest using that method, as between the cost depletion method and the percentage depletion method (without regard to the limitations of Code Section 613A(c)(3) which theoretically could apply to any Partner), which results in the greatest simulated depletion allowance. The simulated depletion allowance with respect to each Oil and Gas Interest shall reduce the Partners’ Capital Accounts in the same proportion as the Partners were allocated adjusted basis with respect to such Oil and Gas Interest under Section 3.3(a). In no event shall the Partnership’s aggregate simulated depletion allowance with respect to an Oil and Gas Interest exceed the Partnership’s adjusted basis in the Oil and Gas Interest (maintained solely for Capital Account purposes).

(2) Upon the taxable disposition of an Oil and Gas Interest by the Partnership, the Partnership shall determine the simulated (hypothetical) gain or loss with respect to such Oil and Gas Interest (solely for Capital Account purposes) by subtracting the Partnership’s simulated adjusted basis for the Oil and Gas Interest sold (maintained solely for Capital Account purposes) from the amount realized by the Partnership upon such disposition. Simulated adjusted basis shall be determined by reducing the adjusted basis by the aggregate simulated depletion charged to the Capital Accounts of all Partners in accordance with Section 3.1(d)(1). The Capital Accounts of the Partners shall be adjusted upward by the amount of any simulated gain on such disposition in proportion to such Partners’ allocable share of the portion of total amount realized from the disposition of such Oil and Gas Interest that exceeds the Partnership’s simulated adjusted basis in such Oil and Gas Interest. The Capital Accounts of the Partners shall be adjusted downward by the amount of any simulated loss in proportion to such Partners’ allocable shares of the total amount realized from the disposition of such Oil and Gas Interest that represents recovery of the Partnership’s simulated adjusted basis in such Oil and Gas Interest.

(e) Except as otherwise provided in this Agreement, neither a Partner nor the Initial Limited Partner shall be obligated to the Partnership or to any other Partner to restore any negative balance in their Capital Accounts. Upon liquidation of the Partnership, or the liquidation of the interest of the Managing General Partner (in each case determined as provided in Treas. Reg. Section 1.704-1(b)(2)(ii)(g), if the Managing General Partner has a deficit balance in its Capital Account after crediting all Profit upon the sale of the Partnership’s assets which have been sold, and after making all allocations provided for herein, then the Managing General Partner shall be obligated to contribute to the Partnership, on or before the later to occur of (i) the close of the Partnership’s taxable year, or (ii) 90 days following such liquidation, an amount equal to such deficit balance for distribution in accordance with the terms of this Agreement.

8

3.2 Allocation of Profits and Losses and Costs and Expenses.

(a) Except as provided in this Section 3.2 or in Section 3.3, the following shall apply:

(1) Profits and Losses of the Partnership (computed without regard to the items referred to in Sections 3.2(a)(2) and 3.2(a)(3)) shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(2) Costs and expenses shall be allocated as follows:

(i) Organizational, syndication, and intangible drilling and development costs and expenses shall be allocated 90% to the Partners and 10% to the Managing General Partner;

(ii) Tangible drilling and development costs and expenses shall be allocated 90% to the Partners and 10% to the Managing General Partner; and

(iii) Operating Costs shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(3) All items of revenue or income attributable to the Partnership shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(b) Notwithstanding anything to the contrary in Section 3.3.2(a), no Partner shall be allocated any item to the extent that such allocation would create or increase a deficit in such Partner’s Capital Account. For purposes of this Section 3.2(b), in determining whether an allocation would create or increase a deficit in an Partner’s Capital Account, such Capital Account shall be reduced for those items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts which such Partner is obligated to restore in accordance with Treas. Reg. Section 1.704-1(b)(2)(ii)(c), or is deemed obligated to restore pursuant to Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Any item, the allocation of which to any Partner is prohibited by this Section 3.2(b), shall be reallocated to those Partners not having a deficit in their Capital Accounts (as adjusted as provided in this Section 3.2(b)) in the proportion that the positive balance of each such Partner’s adjusted Capital Account bears to the aggregate balance of all such Partners’ adjusted Capital Accounts, with any remaining losses or deductions being allocated to the Managing General Partner. Notwithstanding the provisions of Section 3.2(a), to the extent items are allocated to the Partners by virtue of the preceding provisions of this Section 3.2(b), the Profits thereafter recognized shall be allocated to such Partners (in proportion to the items previously allocated to them pursuant to this Section 3.2(b)) until such time as the Profits allocated to them pursuant to this sentence equals the items allocated to them pursuant to the preceding provisions of this Section 3.2(b).

(c) In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate (to the extent required by the regulations) the deficit balance in such Partner’s Capital Account (as adjusted in accordance with the provisions of Section 3.2(b)) as quickly as possible; provided, however, that an allocation pursuant to this Section 3.2(c) shall be made if and only to the extent that such Partner would have a deficit Capital Account (as adjusted in Section 3.2(b)) after all other allocations provided for in Section 3 have been tentatively made as if this Section 3.2(c) were not in this Agreement. It is the intention of the Partners that the provisions of this Section 3.2(c) constitute a “qualified income offset” within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), and such provisions shall be so construed.

9

(d) Notwithstanding any other provision of this Section 3.2, if there is a net decrease in Partnership Minimum Gain during any taxable year, all Partners shall be allocated items of Partnership income and gain for that year equal to that Partner’s share (within the meaning of Treas. Reg. Section 1.704-2(g)(2)) of the net decrease in Partnership Minimum Gain. Notwithstanding the preceding sentence, no such chargeback shall be made to the extent one or more of the exceptions and/or waivers provided for in Treas. Reg. Section 1.704-2(f) applies. This Section 3.2(d) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(f) and shall be interpreted consistently therewith.

(e) Notwithstanding any other provision of this Section 3.2, other than Section 3.2(d), if there is a net decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during any Partnership fiscal year, rules

similar to those contained in Section 3.2(d) shall apply in a manner consistent with Treas. Reg. Section 1.704-2(i)(4). This Section 3.2(e) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(f) Any Partner Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section 1.704-2(i)(1).

(g) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Sections 734(b) or 743(b) is required, pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such regulation.

(h) Notwithstanding anything in this Section 3.2, if as a result of the regulatory allocations provided for in Sections 3.2(c) through 3.2(f) the Managing General Partner determines that the Capital Accounts of the Partners do not reflect the economic agreement among the parties, the Managing General Partner, in its discretion, may adjust the allocations provided for in Section 3.2(a) so that the Capital Accounts of the Partners will be equal to the amount they would have been equal to had such regulatory allocations not been a part of this Agreement.

(i) The Partners are aware of the income tax consequences of the allocations made by this Section 3.2 and hereby agree to be bound by the provisions of this Section 3.2 in reporting their shares of Partnership income and loss for income tax purposes.

(j) For purposes of Code Section 752 and the regulations thereunder, the excess nonrecourse liabilities of the Partnership (within the meaning of Treas. Reg. Section 1.752-3(a)(3)), if any, shall be allocated 90% to the Partners and 10% to the Managing General Partner.

3.3 Depletion.

(a) The depletion deduction with respect to each Oil and Gas Interest of the Partnership shall be computed separately by each Partner in accordance with Code Section 613A(c)(7)(D) for Federal income tax purposes. For purposes of such computation, the adjusted basis of each Oil and Gas Interest shall be allocated in accordance with the Partners’ interests in the capital of the Partnership.

(b) Upon the taxable disposition of an Oil or Gas Interest by the Partnership, the amount realized therefrom shall be allocated among the Partners (for purposes of calculating their individual gain or loss on such disposition for Federal income tax purposes) as follows:

10

(1) The portion of the total amount realized upon the taxable disposition of such property that represents recovery of its simulated adjusted tax basis therein (as calculated pursuant to Section 3.1(d)) shall be allocated to the Partners in the same proportion as the aggregate adjusted basis of such property was allocated to such Partners (or their predecessors in interest) pursuant to Section 3.3(a); and

(2) The portion of the total amount realized upon the taxable disposition of such property that represents the excess over the simulated adjusted tax basis therein shall be allocated in accordance with the provisions of Section 3.1(d) as if such gain constituted an item of Profit.

3.4 Apportionment Among Partners.

(a) Except as otherwise provided in this Agreement, all allocations and distributions to the Partners shall be apportioned among them pro rata based upon the number of Units held by each of the Partners.

(b) For purposes of Section 3.4(a), a Partner’s pro rata share in Units shall be calculated as of the end of the taxable year for which such allocation has been made; provided, however, that if a transferee of a Unit is admitted as a Partner during the course of the taxable year, the apportionment of allocations and distributions between the transferor and transferee of such Unit shall be made in the manner provided in Section 3.4(c).

(c) If, during any taxable year of the Partnership, there is a change in any Partner’s interest in the Partnership, each Partner’s allocation of any item of income, gain, loss, deduction, or credit of the Partnership for such taxable year shall be determined by taking into account the varying interests of the Partners pursuant to such method as is permitted by Code Section 706(d) and the regulations thereunder.

4. Distributions.

4.1 Time of Distribution. The Managing General Partner shall distribute the Partnership’s Distributable Cash at such time as it shall determine, but such distributions shall be made not less frequently than quarterly.

4.2 Distributions. Except as provided in Section 4.3, all distributions (other than those made in connection with the liquidation of the Partnership, which distributions shall be made in accordance with Section 9.3) shall be made 90% to the Partners (and proportionally among them based upon their ownership of Units) and 10% to the Managing General Partner. In no event shall funds be advanced or borrowed for purposes of distributions if the amount of such distributions would exceed the Partnership’s accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied.

4.3 Capital Account Deficits. No distributions shall be made to any Partner to the extent such distribution would create or increase a deficit in such Partner’s Capital Account (as adjusted in Section 3.2(b)). If a distribution is not made to a Partner by reason of the preceding sentence, then the amount which would have been distributed to such Partner shall be distributed to the other Partners in the proportion that the positive Capital Account balance of each Partner bears to the aggregate positive Capital Account balances of all of the Partners. Any such amount remaining after reduction of all Capital Accounts to zero shall be distributed to the Managing General Partner.

5. Activities.

5.1 Management. The Managing General Partner shall conduct, direct, and exercise full and exclusive control over all activities of the Partnership. Partners shall have no power over the conduct of the affairs of the Partnership or otherwise commit or bind the Partnership in any manner. The Managing General Partner shall manage the affairs of the Partnership in a prudent and businesslike fashion and shall use its best efforts to carry out the purposes and character of the business of the Partnership.

11

5.2 Conduct of Operations.

(a) The Partners agree to participate in the Partnership’s program of operations as established by the Managing General Partner; provided, however, that no well drilled to the point of setting casing need be completed if, in the Managing General Partner’s opinion, such well is unlikely to be productive of oil or gas in quantities sufficient to justify the expenditures required for well completion. The Partnership may participate with others in the drilling of wells and it may enter into partnerships or other such arrangements.

(b) The Partnership shall not participate in any joint operations on any co-owned Lease unless there has been acquired or reserved on behalf of the Partnership the right to take in kind or separately dispose of its proportionate share of the oil and gas produced from such Lease, exclusive of production which may be used in development and production operations on the Lease and production unavoidably lost, and, if the Managing General Partner is the operator of such Lease, the Managing General Partner shall enter into written agreements with every other person or entity owning any working or operating interest reserving to such person or entity a similar right to take in-kind so as not to result in the Partnership being treated as a member of an association taxable as a corporation for Federal income tax purposes.

(c) The relationship of the Partnership and the Managing General Partner (or an Affiliate retaining or acquiring an interest) as co-owners in Leases, except to the extent superseded by an operating agreement consistent with the provisions of Section 5.2(c), and except to the extent inconsistent with this Agreement, shall be governed by the AAPL Form 610 Model Operating Agreement-1989, with a provision reserving the right to take production in-kind, naming the Partnership as a non-operator, and with the accounting procedure to govern as the accounting procedures under such operating agreements.

(d) The Managing General Partner is not expected to act as the operator of the Partnership Well, and the Managing General Partner may designate such other persons as it deems appropriate to conduct the actual drilling and producing operations of the Partnership.

(e) The Partnership shall enter into a Turnkey Drilling Contract with the Managing General Partner or its Affiliates as described in the Placement Memorandum.

(f) The funds of the Partnership shall not be commingled with the funds of any other Person.

(g) The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner’s possession or control, and shall not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Partnership.

5.3 Acquisition and Sale of Leases.

(a) To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner or its Affiliate, the remainder of the interest in such Lease may be held by the Managing General Partner or such Affiliate, as applicable, which may retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner or its Affiliate to the exclusion of the Partnership. Any Leases acquired by the Partnership from the Managing General Partner or its Affiliate shall be acquired at the fair market value of such property.

(b) The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership’s best interest.

12

5.4 Title to Leases.

(a) Record title to each Lease acquired by the Partnership may be temporarily held in the name of the Managing General Partner, or in the name of any nominee designated by the Managing General Partner, as agent for the Partnership until a productive well is completed on a Lease. Thereafter, record title to Leases shall be assigned to and placed in the name of the Partnership.

(b) The Managing General Partner shall take the necessary steps in its best judgment to render title to the Leases to be assigned to the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on any Prospect acquired by the Partnership unless the Managing General Partner is satisfied that the undertaking of such operation would be in the best interest of Partners and the Partnership. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or Partners for any mistakes of judgment unless such mistakes were made in a manner not in accordance with general industry standards in the geographic area. Neither the Managing General Partner nor its Affiliates shall be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to any Lease assigned to the Partnership or the extent of the interest covered thereby.

5.5 Release, Abandonment, and Sale or Exchange of Properties. Except as provided elsewhere in Section 5 and in Section 6.3, the Managing General Partner shall have full power to dispose of the production and other assets of the Partnership, including the power to determine which Leases shall be released or permitted to terminate, those wells to be abandoned, whether any Lease or well shall be sold or exchanged, and the terms therefor.

5.6 Certain Transactions With Managing General Partner or Affiliates. Any services, equipment, or supplies which the Managing General Partner or an Affiliate furnishes to the Partnership which is not specifically referred to herein shall be furnished at a competitive rate which could be obtained in the geographical area of operations. Any such services for which the Managing General Partner or an Affiliate is to receive compensation shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid.

6. Managing General Partner.

6.1 Managing General Partner. The Managing General Partner shall have the sole and exclusive right and power to manage and control the affairs of and to operate the Partnership, to do all things necessary to carry on the business of the Partnership for the purposes described in Section 1.4 and to conduct the activities of the Partnership as set forth in Section 5. No financial institution or any other person, firm, or corporation dealing with the Managing General Partner shall be required to ascertain whether the Managing General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm, or corporation shall be protected in relying solely upon the deed, transfer, or assurance of, and the execution of such instrument or instruments by, the Managing General Partner. The Managing General Partner shall devote so much of its time to the business of the Partnership as in its judgment the conduct of the Partnership’s business shall reasonably require and shall not be obligated to do or perform any act or thing in connection with the business of the Partnership not expressly set forth herein. The Managing General Partner may engage in business ventures of any nature and description independently or with others and neither the Partnership nor any of the Partners shall have any rights in and to such independent ventures or the income or profits derived therefrom.

6.2 Authority of Managing General Partner. The Managing General Partner is specifically authorized and empowered, on behalf of the Partnership, and by consent of the Partners herein given, to do any act, execute any document or enter into any contract or any agreement of any nature necessary or desirable, in the opinion of the Managing General Partner, in pursuance of the purposes of the Partnership. Without limiting the generality of the foregoing, in addition to any and all other powers conferred upon the Managing General Partner pursuant to this Agreement and the Act, and except as otherwise prohibited by law or hereunder, the Managing General Partner shall have the power and authority to:

13

(a) Acquire Leases and other Oil and Gas Interests in furtherance of the Partnership’s business;

(b) Enter into and execute pooling agreements, farm out agreements, operating agreements, unitization agreements, dry and bottom hole and acreage contribution letters, construction contracts, and any and all documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, or operation of Oil and Gas Interests, and all other instruments deemed by the Managing General Partner to be necessary or appropriate to the proper operation of Oil or Gas Interests or to effectively and properly perform its duties or exercise its powers hereunder;

(c) Make expenditures and incur any obligations it deems necessary to implement the purposes of the Partnership, employ and retain such personnel as it deems desirable for the conduct of the Partnership’s activities, including employees, consultants, and attorneys and exercise on behalf of the Partnership, in such manner as the Managing General Partner, in its sole judgment, deems best, all rights, elections, and obligations granted to or imposed upon the Partnership;

(d) Manage, operate, and develop any Partnership property, and enter into operating agreements and other agreements with respect to properties acquired by the Partnership, including an operating agreement and turnkey drilling contract with the Managing General Partner as described in the Placement Memorandum, which agreements may contain such terms, provisions, and conditions as are usual and customary within the industry and as the Managing General Partner shall approve;

(e) Compromise, sue, or defend any and all claims in favor of or against the Partnership;

(f) Subject to the provisions of Section 8.4, make or revoke any election permitted the Partnership by any taxing authority;

(g) Perform any and all acts it deems necessary or appropriate for the protection and preservation of Partnership assets;

(h) Maintain, at the expense of the Partnership, such insurance coverage for public liability, fire and casualty, and any and all other insurance necessary or appropriate to the business of the Partnership in such amounts and of such types as it shall determine from time to time;

(i) Buy, sell, or lease property or assets on behalf of the Partnership;

(j) Enter into agreements to hire services of any kind or nature;

(k) Assign interests in properties to the Partnership;

(l) Enter into soliciting dealer agreements and perform all of the Partnership’s obligations thereunder, to issue and sell Units pursuant to the terms and conditions of this Agreement, the Subscription Agreements, and the Placement Memorandum, to accept and execute on behalf of the Partnership Subscription Agreements, and to admit Partners and Substitute Partners; and

(m) Perform any and all acts, and execute any and all documents, it deems necessary or appropriate to carry out the purposes of the Partnership.

6.3 Certain Restrictions on Managing General Partner’s Power and Authority. Notwithstanding any other provisions of this Agreement to the contrary, neither the Managing General Partner nor any of its Affiliates shall have the power or authority to, and shall not, do, perform, or authorize any of the following:

14

(a) Without having first received the prior consent of the holders of a majority of the then outstanding Units entitled to vote,

(1) sell all, or substantially all, of the assets of the Partnership (except upon liquidation of the Partnership pursuant to Section 9), unless cash funds of the Partnership are insufficient to pay the obligations and other liabilities of the Partnership;

(2) dispose of the goodwill of the Partnership; or

(3) do any other act which would make it impossible to carry on the ordinary business of the Partnership;

(b) Bind or obligate the Partnership with respect to any matter outside the scope of the Partnership business;

(c) Use the Partnership name, credit, or property for other than Partnership purposes;

(d) Utilize Partnership funds to invest in the securities of another Person except in the following instances:

(1) investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership’s business;

(2) temporary investments made in compliance with Section 2.2(c);

(3) investments which are a necessary and incidental part of a property acquisition transaction; and

(4) investments in entities established solely to limit the Partnership’s liabilities associated with the ownership or operation of property or equipment; provided, however, that in such instances duplicative fees and expenses shall be prohibited.

(e) Sell, transfer, or assign its interest (except for a collateral assignment which may be granted to a bank or other financial institution) in the Partnership, or any part thereof, or otherwise withdraw as Managing General Partner without written notice to the Partners.

6.4 Indemnification of Managing General Partner. The Managing General Partner shall have no liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that such course of conduct was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that such course of conduct did not constitute gross negligence or willful misconduct of the Managing General Partner. The Managing General Partner shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, and amounts paid in settlement of any claims sustained by it in connection with the Partnership, provided that the Managing General Partner has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that the same were not the result of gross negligence or willful misconduct on the part of the Managing General Partner. Indemnification of the Managing General Partner is recoverable only from the tangible net assets of the Partnership, including the insurance proceeds from the Partnership’s insurance policies and the insurance and indemnification of the Partnership’s subcontractors, and is not recoverable from the Partners.

15

6.5 Withdrawal.

(a) Notwithstanding the limitations contained in Section 6.3(e), the Managing General Partner shall have the right, by giving written notice to the Partners, to substitute in its stead as Managing General Partner any successor entity or any entity controlled by the Managing General Partner, and the Partners, by execution of this Agreement, hereby expressly consent to such a transfer unless it would adversely affect the status of the Partnership as a partnership for Federal income tax purposes.

(b) The Managing General Partner may voluntarily withdraw from the Partnership after written notice to the Partners.

(c) In the event a Managing General Partner withdraws and the Partners elect to continue the Partnership, the withdrawing Managing General Partner’s interest in the assets of the Partnership shall be determined by independent appraisal by a qualified independent petroleum engineering consultant who shall be selected by mutual agreement of the Managing General Partner and the successor Managing General Partner. Such appraisal will take into account an appropriate discount to reflect the risk of recovery of oil and gas reserves. The withdrawn Managing General Partner shall be paid for its interest within ten days of the determination of the value of such interest.

6.6 Tax Matters Partner. The Managing General Partner shall serve as the Tax Matters Partner for purposes of Code Sections 6221 through 6233. The Partnership may engage its accountants and/or attorneys to assist the Tax Matters Partner in discharging its duties hereunder.

6.7 Organization and Offering Fee. The Partnership shall pay the Managing General Partner an Organization Fee of up to $4,972.

7. Partners.

7.1 Management. No Partner shall take part in the control or management of the business or transact any business for the Partnership, and no Partner shall have the power to sign for or bind the Partnership, all of such authority having been given to the Managing General Partner in Section 6. Any action or conduct of Partners on behalf of the Partnership is hereby expressly prohibited. Any Partner who violates the provisions of this Section 7.1 shall be liable to the remaining Partners, the Managing General Partner, and the Partnership for any damages, costs, or expenses any of them may incur as a result of such violation. Partners shall have the right to vote only with respect to those matters specifically provided for in these Sections.

7.2 Assignment of Units.

(a) A Partner may transfer all or any portion of the Partner’s Units, subject to the following conditions:

(1) No such assignment shall be made if, in the opinion of counsel to the Partnership, such assignment would cause the termination of the Partnership for federal income tax purposes under Section 708 of the Code or might result in a change in the status of the Partnership to a “publicly traded partnership” within the meaning of Section 7704 of the Code, or if in the opinion of counsel to the Partnership such assignment may not be effected without registration under the Securities Act of 1933, as amended, or would result in the violation of any applicable state securities laws;

(2) Except in the case of a transfer of Units at death, as a result of adjudication of incompetency or insanity, or involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Partnership such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such transfer;

16

(3) The transferor and transferee shall furnish the Partnership with the transferee’s taxpayer identification number and sufficient information to determine the transferee’s initial tax basis in the Units transferred;

(4) The Partnership is reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such transfer; and

(5) If the transferor is an Additional General Partner, the Managing General Partner has consented to the transfer, which shall be in the sole discretion of the Managing General Partner.

(b) A Person who acquires one or more Units but who is not admitted as a Substitute Partner, shall only be entitled to allocations and distributions with respect to such Units in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of an Additional General Partner or a Limited Partner under the Act or this Agreement.

(c) Subject to the other provisions of Section 7, a transferee of Units may be admitted to the Partnership as a Substitute Partner only upon satisfaction of the following conditions:

(1) The Managing General Partner consents to such admission, which consent can be withheld in its absolute discretion;

(2) The Units with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer;

(3) The transferee becomes a party to this Agreement as a Partner and executes such documents and instruments as the Managing General Partner may reasonably request as may be necessary or appropriate to confirm such transferee as a Partner of the Partnership and such transferee’s agreement to be bound by the terms and conditions hereof; and

(4) If the transferee is not an individual of legal majority, the transferee provides the Partnership with evidence satisfactory to counsel for the Partnership of the authority of the transferee to become a Partner and to be bound by the terms and conditions of this Agreement.

(d) In any calendar quarter in which a transfer of a Unit occurs, the Partnership shall recognize the assignment not later than the last day of the calendar month following receipt of notice of assignment and required documentation.

(e) Each Partner hereby covenants and agrees with the Partnership, for the benefit of the Partnership and all Partners, that (i) the Partner is not currently making a market in Units and (ii) the Partner will not transfer any Unit on an established securities market or a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any regulations, proposed regulations, revenue rulings, or other official pronouncements of the Internal Revenue Service that may be promulgated or published thereunder). Each Partner further agrees that the Partner will not transfer any Unit to any Person unless such Person agrees to be bound by the provisions of this Section 7.2 and to transfer such Units only to Persons who agree to be similarly bound.

7.3 Prohibited Transfers.

(a) Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no effect whatever. If, however, the Partnership is required by a court of competent jurisdiction to recognize a transfer that is not a Permitted Transfer (or if the Managing General Partner, in its sole discretion, elects to recognize a transfer that is not a Permitted Transfer), the Partnership shall have the right (without limiting any other legal or equitable rights of the Partnership) to withhold distributions to which such transferee would otherwise be entitled and apply such distributions to satisfy the debts, obligations, or liabilities for damages that the transferor or transferee of such Units may have to the Partnership.

17

(b) In the case of a transfer or attempted transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such transfer shall be liable to indemnify and hold harmless the Partnership and the other Partners from all cost, liability, and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby.

7.4 Withdrawal by Partners. A Partner may not withdraw from the Partnership, except as otherwise provided in this Agreement.

7.5 Calling of Meetings. Partners owning 20% or more of the then outstanding Units entitled to vote shall have the right to request that the Managing General Partner call a meeting of the Partners. The Managing General Partner shall call such a meeting and shall deposit in the United States mails within 15 days after receipt of such request written notice to all Partners of the meeting and the purpose of the meeting, which shall be held on a date not less than 30, nor more than 60, days after the date of the mailing of such notice, at a reasonable time and place. Partners shall have the right to submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of Partners for consideration and approval by the Partners. Partners shall have the right to vote in person or by proxy.

7.6 Voting Rights. Partners shall be entitled to all voting rights granted to them under this Agreement and as specified by the Act. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Except as otherwise provided herein, at any meeting of Partners, a vote of a majority of Units represented at such meeting, in person or by proxy, with respect to matters considered at the meeting at which a quorum is present shall be required for approval of any such matters.

7.7 Voting by Proxy. The Partners may vote either in person or by proxy.

7.8 Conversion of Additional General Partner Units to Limited Partner Interests.

(a) Automatic Conversion. After the Partnership Well has been drilled and completed, the Managing General Partner shall file an amended certificate of limited partnership with the Secretary of State of the state of Kentucky for the purpose of converting the Additional General Partner Units to Limited Partners interests.

(b) Additional General Partners Shall Have Contingent Liability. Upon conversion the Additional General Partners shall be Limited Partners entitled to limited liability; however, they shall remain liable to the Partnership for any additional Capital Contribution required for their proportionate share of any Partnership obligation or liability arising before the conversion of their Units as provided in Section 3.05(b)(2).

(c) Conversion Shall Not Affect Allocations. The conversion shall not affect the allocation to any Participant of any item of Partnership income, gain, loss, deduction or credit or other item of special tax significance other than Partnership liabilities, if any. Further, the conversion shall not affect any Participant’s interest in the Partnership’s oil and gas properties and unrealized receivables.

(d) Right to Convert if Reduction of Insurance. Notwithstanding the foregoing, the Managing General Partner shall notify all Participants at least 30 days before the effective date of any adverse material change in the Partnership’s insurance coverage. If the insurance coverage is to be materially reduced, then the Additional General Partners shall have the right to convert their Units into Limited Partner interests before the reduction by giving written notice to the Managing General Partner.

18

7.9 Liability of Partners. Except as otherwise provided in this Agreement or the Act, each Additional General Partner shall be jointly and severally liable for the debts and obligations of the Partnership. In addition, each Additional General Partner shall be jointly and severally liable for any wrongful acts or omissions of the Managing General Partner and/or the misapplication of money or property of a third party by the Managing General Partner acting within the scope of its apparent authority to the extent such acts or omissions are chargeable to the Partnership.

8. Books and Records.

8.1 Books and Records.

(a) For accounting and income tax purposes, the Partnership shall operate on a calendar year.

(b) The Managing General Partner shall keep just and true records and books of account with respect to the operations of the Partnership and shall maintain and preserve during the term of the Partnership and for four years thereafter all such records, books of account, and other relevant Partnership documents. The Managing General Partner shall maintain for at least six years all records necessary to substantiate the fact that Units were sold only to purchasers for whom such Units were suitable. Such books shall be maintained at the principal place of business of the Partnership and shall be kept on the accrual method of accounting.

(c) The Managing General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership’s business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including the names and addresses of Partners, books of account, and records of Partnership proceedings, may be kept on any electronic information storage device; provided, however, that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books and records of the Partnership shall be made available for review by any Partner or the Partner’s representative at any reasonable time.

(d) The Participant List shall be maintained as a part of the books and records of the Partnership and shall be available for the inspection by any Partner or such Partner’s designated agent at the principal office of the Partnership upon the request of any Partner and shall be updated at least quarterly to reflect changes in the information contained therein.

8.2 Reports. The Managing General Partner shall deliver to each Partner the following financial statements and reports at the times indicated below:

(a) By March 15 of each year, a report containing such information as to enable each Partner to prepare and file such Partner’s Federal income tax return.

(b) Such other reports and financial statements as the Managing General Partner shall determine from time to time.

8.3 Bank Accounts. All funds of the Partnership shall be deposited in such separate bank account or accounts, short term obligations of the U.S. Government or its agencies, or other interest-bearing investments and money market or liquid asset mutual funds as shall be determined by the Managing General Partner. All withdrawals therefrom shall be made upon checks signed by the Managing General Partner or any person authorized to do so by the Managing General Partner.

19

8.4 Federal Income Tax Elections.

(a) Except as otherwise provided in this Section 8.4, all elections required or permitted to be made by the Partnership under the Code shall be made by the Managing General Partner in its sole discretion. Each Partner agrees to provide the Partnership with all information necessary to give effect to any election to be made by the Partnership.

(b) The Partnership shall elect to currently deduct intangible drilling and development costs as an expense for income tax purposes and shall require any partnership, joint venture, or other arrangement in which it is a party to make such an election.

9. Dissolution; Winding-Up.

9.1 Dissolution.

(a) Except as otherwise provided herein, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, or bankruptcy of any Partner shall not dissolve the Partnership. The successor to the rights of such Partner shall have all the rights of an Partner for the purpose of settling or administering the estate or affairs of such Partner; provided, however, that no successor shall become a Substitute Partner except in accordance with Section 7; and provided further that upon the occurrence of any of the events referred to in the first sentence of this Section 9.1(a) with respect to an Additional General Partner, the Partnership shall be dissolved and wound up unless at that time there is at least one other Additional General Partner, in which event the business of the Partnership shall continue to be carried on. Neither the expulsion of any Partner, nor the admission or substitution of an Partner, shall work a dissolution of the Partnership. The estate of a deceased, insane, incompetent, or bankrupt Partner shall be liable for all his liabilities as a Partner.

(b) Notwithstanding anything in the Act to the contrary, the Partnership shall be dissolved upon, but not before, the earliest to occur of (i) the written consent of the Managing General Partner and Partners owning a majority of the then outstanding Units to dissolve and wind up the affairs of the Partnership; (ii) subject to the provisions of Section 9.1(c), the retirement, withdrawal, removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in the case of a corporate Managing General Partner, the withdrawal, removal, filing of a certificate of dissolution, liquidation, or bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or abandonment of all, or substantially all, of the Partnership’s property and the sale and/or collection of any evidences of indebtedness received in connection therewith; (iv) December 31, 2061 or (v) a dissolution event described in Section 9.1(a).

(c) In the case of any event described in Section 9.1(b)(ii), if a successor Managing General Partner is selected by Partners owning a majority of the then outstanding Units within 90 days after such event, and if such Partners agree within such 90 day period to continue the business of the Partnership, then the Partnership shall not be dissolved.

(d) If, notwithstanding the provisions of this Agreement, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a Partner’s interest in the Partnership, or the substitution or admission of a new Partner, shall be deemed under the Act to cause a dissolution of the Partnership, then, except as provided in Section 9.1(c), the remaining Partners may, in accordance with the Act, continue the Partnership business as a new partnership and all such remaining Partners agree to be bound by the provisions of this Agreement.

9.2 Liquidation. Upon a dissolution of the Partnership, the Managing General Partner, or in the event there is no Managing General Partner, any other Person selected by the Partners to act as the liquidator, shall cause the affairs of the Partnership to be wound up and shall take account of the Partnership’s assets (including Capital Contributions, if any, of the Managing General Partner pursuant to Section 3.1(e)) and, subject to the provisions of Section 9.3(b) shall be liquidated as promptly as is consistent with obtaining the fair market value thereof (which dissolution and liquidation may be accomplished over a period spanning one or more tax years in the sole discretion of the Managing General Partner or the liquidator), and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in accordance with Section 9.3.

20

9.3 Winding-Up.

(a) Upon the dissolution of the Partnership and winding up of its affairs, the assets of the Partnership shall be distributed as follows:

(1) all of the Partnership’s debts and liabilities to Persons other than to Partners shall be paid and discharged;

(2) to the establishment of any cash reserves which the Managing General Partner or liquidator determines to create in their sole discretion for unmatured and/or contingent liabilities or obligations of the Partnership; and

(3) to the Partners, in accordance with their respective Capital Accounts; provided, however, that if the Managing General Partner or liquidator establishes any reserves in accordance with the provisions of Section 9.3(a)(2), then the distributions pursuant to this Section 9.3(a)(3) (including distribution of any released reserves) shall be pro rata in accordance with the balances of the Partners’ Capital Accounts.

(b) Distributions pursuant to Section 9.3 shall be made in cash or in kind to the Partners, at the election of the Managing General Partner. Notwithstanding the provision of this Section 9.3(b), in no event shall the Partners reserve the right to take in kind and separately dispose of their share of production.

(c) Any in kind property distributions to the Partners shall be made to a liquidating trust or similar entity for the benefit of the Partners, unless at the time of the distribution:

(1) the Managing General Partner shall offer the individual Partners the election of receiving in kind property distributions and the Partners accept such offer after being advised of the risks associated with such direct ownership; or

(2) there are alternative arrangements in place which assure the Partners that they will not, at any time, be responsible for the operation or disposition of Partnership properties.

10. Power of Attorney.

10.1 Managing General Partner as Attorney-in-Fact. Each Partner makes, constitutes, and appoints the Managing General Partner their true and lawful attorney-in-fact, with full power of substitution, in the name, place, and stead of the Partner, from time to time to make, execute, sign, acknowledge, and file:

(a) Any notices or certificates as may be required under the Act and under the laws of any other state or jurisdiction in which the Partnership shall engage, or seek to engage, to do business and to do such other acts as are required to constitute the Partnership as a limited partnership under such laws.

(b) Any amendment to the Agreement pursuant to and which complies with Section 11.9.

(c) Such certificates, instruments, and documents as may be required by, or may be appropriate under the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business.

21

(d) Such certificates, instruments, and documents as may be required by, or as may be appropriate for the Partner to comply with, the laws of any state or other jurisdiction to reflect a change of name or address of the Partner.

(e) Such certificates, instruments, and documents as may be required to be filed with the Department of Interior (including any bureau, office or other unit thereof, whether in Washington, D.C. or in the field, or any officer or employee thereof), as well as with any other federal or state agencies, departments, bureaus, offices, or authorities and pertaining to (i) any and all offers to lease, Leases (including amendments, modifications, supplements, renewals, and exchanges thereof) of, or with respect to, any lands under the jurisdiction of the United States or any state including, without limitation, lands within the public domain, and acquired lands, and provides for the leasing thereof, (ii) all statements of interest and holdings on behalf of the Partnership or the Partner; (iii) any other statements, notices, or communications required or permitted to be filed or which may hereafter be required or permitted to be filed under any law, rule, or regulation of the United States, or any state relating to the leasing of lands for oil or gas exploration or development, (iv) any request for approval of assignments or transfers of oil and gas Leases, any unitization or pooling agreements and any other documents relating to lands under the jurisdiction of the United States or any state; and (v) any other documents or instruments which said attorney-in-fact, in its sole discretion, shall determine should be filed.

(f) Any further document, including furnishing verified copies of this Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider necessary or convenient in connection with any of the foregoing, hereby giving said attorney-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the foregoing as fully as the undersigned might and could do if personally present, and hereby ratifying and confirming all that said attorney-in-fact shall lawfully do to cause to be done by virtue hereof.

10.2 Nature as Special Power. The foregoing grant of authority:

(a) is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incompetency of the Partner granting it;

(b) shall survive the delivery of any assignment by the Partner of the whole or any portion of the Partner’s Units; except that where the assignee thereof has been approved by the Managing General Partner for admission to the Partnership as a Substitute Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file any instrument necessary to effect such substitution; and

(c) may be exercised by said attorney-in-fact by a listing of all of the Partners executing any instrument with a single signature of said attorney-in-fact.

11. Miscellaneous Provisions.

11.1 Liability of Parties. By entering into this Agreement, no party shall become liable for any other party’s obligations relating to any activities beyond the scope of this Agreement, except as provided by the Act. If any party suffers, or is held liable for, any loss or liability of the Partnership which is in excess of that agreed upon herein, such party shall be indemnified by the other parties, to the extent of their respective interests in the Partnership, as provided herein.

11.2 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed or sent by registered or certified mail, postage and charges prepaid, addressed as follows (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section):

22

(a) If to the Managing General Partner, 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

(b) If to a Partner, at such Partner’s address for purposes of notice which is set forth on Exhibit A attached hereto. Unless otherwise expressly set forth in this Agreement to the contrary, any such notice shall be deemed to be given on the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid.

11.3 Paragraph Headings, Section References. The headings in the Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. All references herein to Sections shall refer to Sections of this Agreement unless the context clearly requires otherwise.

11.4 Severability. Every portion of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement.

11.5 Sole Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly approved and executed by the Managing General Partner and such percentage of Partners as provided in Section 11.9.

11.6 Applicable Law. This Agreement, shall be governed by, and construed in accordance with, the laws of the State of Kentucky without regard to its conflict of law rules.

11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had all signed the same document. All counterparts shall be construed together and shall constitute one agreement.

11.8 Waiver of Action for Partition. Each Partner irrevocably waives, during the term of the Partnership, any right that such Partner may have to maintain any action for partition with respect to the Partnership and the property of the Partnership.

11.9 Amendments.

(a) Unless otherwise specifically herein provided, this Agreement shall not be amended without the consent of Partners owning a majority of the then outstanding Units entitled to vote.

(b) The Managing General Partner may, without notice to, or consent of, any Partner, amend any provisions of this Agreement, or consent to and execute any amendment to this Agreement, to reflect:

(1) A change in the name or location of the principal place of business of the Partnership;

(2) The admission of Substitute Partners or additional Partners in accordance with this Agreement;

(3) A reduction in, return of, or withdrawal of, all or a portion of any Partner’s Capital Contribution;

(4) A correction of any typographical error or omission;

23

(5) A change which is necessary in order to qualify the Partnership as a limited partnership under the laws of any other state or which is necessary or advisable, in the opinion of the Managing General Partner, to ensure that the Partnership will be treated as a partnership and not as an association taxable as a corporation for Federal income tax purposes;

(6) A change in the allocation provisions, in accordance with the provisions of Section 3.2(a), in a manner that, in the sole opinion of the Managing General Partner (which opinion shall be determinative), would result in the most favorable aggregate consequences to the Partners as nearly as possible consistent with the allocations contained herein, for such allocations to be recognized for Federal income tax purposes due to developments in the Federal income tax laws or otherwise; or

(7) Any other amendment similar to the foregoing; provided however, that the Managing General Partner shall have no authority, right, or power under this Section 11.9(b) to amend the voting rights of the Partners.

11.10 Substitution of Signature Pages. This Agreement has been executed in duplicate by the Partners and one executed copy of the signature page is attached to the Partner’s copy of this Agreement. It is agreed that the other executed copy of such signature page may be attached to an identical copy of this Agreement together with the signature pages from counterpart Agreements which may be executed by other Partners.

11.11 Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference.

24

2011-C Bayou City Offset Drilling Program, L.P.

PARTNERSHIP AGREEMENT SIGNATURE PAGE

__________ Number of Units of Limited Partnership interest

__________ Number of Units of General Partnership interest

__________	Cash Payment - $44,750per Unit to be paid as follows:
	$30,000 payable upon subscription for the drilling and testing of the Glasscock Ranch Prospect Well. (Payable to “AB & T, Escrow Agent for the 2011-C Bayou City Offset Drilling Program, L.P.”)
	$14,750 payable if and when the Managing General Partner decides to complete the Glasscock Ranch Prospect Well (Payable to “2011-C Bayou City Offset Drilling Program, L.P.”)

REGISTRATION INFORMATION

Print Name	Print Name of Joint Owner (if applicable)
Social Security Number or Tax ID Number	Social Security Number or Tax ID Number
Drivers License Number	Drivers License Number
X	X
Signature	Signature of Joint Owner
Mailing Address:	SELLING BROKER/DEALER’S ACCEPTANCE
	Broker/Dealer:
	Date:
Home Ph #:	DEALER MANAGER’S ACCEPTANCE
Work Ph #:	Source Capital Group, Inc., as Dealer Manager, herewith accepts
	the foregoing subscription.
Email:
	Source Capital Group, Inc.
	Date:

Check One:			PARTNERSHIP’S ACCEPTANCE
	Individual	IRA
	J/T/W/R/O/S	Keogh	Bayou City Exploration, Inc., as Managing General
	Partnership	TIC	Partner, herewith accepts the foregoing
	Trust Created on _____	Corporation	subscription in the 2011-C Bayou City Offset
	Limited Liability	Community Property	Drilling Program, L.P.
	Company
			Stephen C. Larkin, Chief Financial Officer
			Date:

25

EXHIBIT A

TO

AGREEMENT OF LIMITED PARTNERSHIP

OF

2011-C Bayou City Offset Drilling Program, L.P.

Names and Addresses of Investors Nature of Interest Number of Units

26

EX-10.2

Exhibit 10.2

TURNKEY DRILLING CONTRACT

THIS AGREEMENT is made and entered into as of the 28^th day of April, 2011 by and between the parties herein designated as "Partnership" and "Contractor."

Partnership:	2011-C Bayou City Offset Drilling Program, L.P.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101
Contractor:	Bayou City Exploration, Inc.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained, Partnership engages Contractor as an Independent Contractor to furnish the equipment, labor and services to drill, test, and complete its working interest portion, as per Exhibit “1”, of the well to be drilled on the Partnership Prospect in Colorado County in search of oil and/or gas.

As a Management Fee for the supervision and management of the affairs of the Partnership during the work over, drilling and testing periods of Initial Operations, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Drilling Price over the actual cost of such operations. Likewise, during the completion period of Initial Operations, if completion is attempted on the Prospect Well, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Completion Price over the actual costs of such operations. The Managing General Partner intends to enter into one or more Operating Agreements (the “Operating Agreements”) with third party operators which will perform certain services with respect to the work over, drilling, testing and, if applicable, completion of the Prospect Well. We cannot accurately predict the actual amount constituting compensation to be paid to any third party operator for its services under the Operating Agreements and therefore, it also cannot accurately predict the excess amount, if any, of the Turnkey Drilling Price over the actual cost of such operations that the Managing General Partner will receive. Costs to be expended under the Operating Agreements are a direct result of the work over, drilling, testing and completion risks encountered. During work over, drilling, testing and completion operations, a variety of conditions may be encountered, such as loss of circulation, blowouts, detachment and/or loss of drilling equipment, necessity for the purchase and installation of down-hole equipment to keep the wellbore intact, and repair of inadequate cement to hold production casing in place. As such costs are unpredictable with any degree of certainty, in the event of totally uneventful operations, compensation payable pursuant to the Operating Agreements could equal or exceed the actual work over, drilling, testing and completion costs. Likewise, in the event that a series of major difficulties are encountered, these costs could equal or exceed the amount of Initial Capital, and Bayou City Exploration, Inc. would be responsible for such excess costs. Bayou City Exploration, Inc. may use any funds it receives from management fees and/or profits, if any, for any purpose, including payment of General and Administrative Expenses of Bayou City Exploration, Inc. such as employee salaries and office expenses.

1.             LOCATION OF PARTNERSHIP WELL(S):

See Exhibit "1" attached hereto and made a part hereof.

1

2.             TERMINATION DATE:

Contractor agrees to use its best efforts to complete operations for the acquisition, drilling and testing of the Partnership Wells by October 31, 2011, and Contractor and the Partnership agree that time is of the essence under this Agreement.

3.             BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:

Contractor shall be paid at the following rate for the work performed hereunder:

Turnkey Drilling Price ($285,000) and Completion Price in the event that completion is attempted ($140,125) = Total $425,125.

4.             DEPTH:

Subject to the right of the Partnership to direct the stoppage of work at any time (as provided in paragraph 7), the Partnership Well shall be drilled to the depth as specified in Exhibit “1” or to the depth at which the production casing (production string) is set, whichever depth is first reached, which depth is hereinafter referred to as the “Contract Depth.”

5.             TIME OF PAYMENT:

5.1 Basis: Payment by the Partnership to the Contractor of the Drilling Price becomes due and payable upon the receipt by the Partnership of an invoice from the Contractor. Neither commencement nor completion of Contractor’s performance shall be a condition precedent to this obligation to pay.

5.2 Attorneys’ Fees: If this Agreement is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or probate proceedings, then the Partnership agrees that there shall be added to the amount due reasonable attorneys' fees and costs.

6.             COMPLETION PROGRAM:

The Contractor, in its capacity as Managing General Partner of the Partnership (the “Managing General Partner”), along with other participating Partnership Well working interest owners, shall determine whether Contractor shall set a production string on the Prospect Well.  In the event the Managing General Partner directs that drilling operations cease and to abandon the Partnership Well, Contractor shall plug the Partnership Well, remove all drilling apparatus from the well site and the obligations of the parties hereunder shall cease.  In the event the Managing General Partner directs Contractor to set a production string on the Prospect Well and makes timely payment to the Contractor of the Completion Price, Contractor shall commence the operations necessary to attempt to complete the on the Prospect Well for commercial production, including the setting of a production string and the acquisition, delivery and installation of a pump jack, holding tank and all other necessary equipment needed to extract and contain oil and/or gas from the Partnership Well.

2

7.             STOPPAGE OF WORK BY THE PARTNERSHIP:

Notwithstanding the provisions of paragraph 3 with respect to the depth to be drilled, the Managing General Partner shall have the right to direct the stoppage of the work to be performed by the Contractor hereunder at any time prior to reaching the Contract Depth and even though Contractor has made no default hereunder.  If the Partnership exercises its right to discontinue drilling the well(s), the Partnership will not receive a refund for any unused portion of the Drilling Price allocable to the discontinued well(s).

8.             REPORTS TO BE FURNISHED BY CONTRACTOR:

8.1 Contractor shall keep and furnish to the Partnership an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report form or other form acceptable to the Partnership.  A legible copy of said form signed by Contractor’s representative shall be furnished by Contractor to the Partnership.

8.2 Delivery tickets, if requested by the Partnership, covering any material or supplies furnished by the Partnership shall be turned in each day with the daily drilling report.  The quantity, description and condition of materials and supplies so furnished shall be checked by Contractor and such tickets shall be properly certified by Contractor.

9.             RESPONSIBILITY FOR A SOUND LOCATION:

Contractor shall prepare a sound location, adequate in size and capable of properly supporting the drilling rig.  Contractor shall be responsible for a conductor pipe program adequate to prevent soil and subsoil washout.  In the event subsurface conditions cause a cratering or shifting of the location surface, and loss or damage to the rig or its associated equipment results therefrom, the Partnership shall not be responsible for reimbursing Contractor for any such loss or damage including payment of work stoppage rate during repair and/or demobilization if applicable.

10.             RESPONSIBILITY FOR ROAD AND LOCATIONS:

Contractor agrees at all times to maintain roads to locations and each location in such a condition that will allow free access and movement to and from the drilling site in an ordinarily equipped highway type vehicle.

11.             PAYMENT OF CLAIMS:

Contractor agrees to pay all claims for labor, material, services and supplies to be furnished by Contractor hereunder, and agrees to allow no lien or charge to be fixed upon the lease, the Partnership Well or other property of the Partnership or the land upon which said Partnership Well is located.

12.             RESPONSIBILITY FOR LOSS OR DAMAGE:

12.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times for damage to or destruction of Contractor’s surface equipment, including but not limited to all drilling tools, machinery and appliances, for use above the surface, regardless of when or how such damage or destruction occurs.

12.2 Contractor’s In-Hole Equipment Basis: Contractor shall assume liability at all times for damage to or destruction of Contractor’s in-hole equipment, including but not limited to drill pipe, drill collars and tool joints, and the Partnership shall be under no liability to reimburse Contractor for any such loss.

3

12.3 Partnership’s Equipment: The Partnership shall assume liability at all times for any defective equipment owned by it, including but not limited to casing, tubing, well head equipment, and Contractor shall be under no liability to reimburse the Partnership for any such loss or damage.

12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole for any cause attributable to Contractor's operators be lost or damaged while Contractor is engaged in the performance of work hereunder, all such loss of or damage to the hole including cost of regaining control of a fire or blowout, shall be borne by Contractor; and if the hole is not in condition to be carried to the Contract Depth as herein provided, Contractor shall, if requested by the Partnership, commence a new hole without delay at Contractor's cost; and the drilling of the new hole shall be conducted under the terms and conditions of this Agreement in the same manner as though it were the first hole and Contractor shall be responsible for replacement of any casing lost in a junked and abandoned hole as well as the cost of preparing a new drill site for the new hole and the road thereto.  In such case, Contractor shall not be entitled to any payment or compensation for expenditures made or incurred by Contractor on or in connection with the abandoned hole.

13.             NO WAIVER EXCEPT IN WRITING:

It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the party.

14.             FORCE MAJEURE:

If either party hereto is rendered unable, wholly or in part (and its performance hereunder is not rendered merely commercially impracticable) by force majeure to carry out its obligation under this Agreement, it shall give the other party prompt written notice of the force majeure with reasonably full particulars.  Thereupon, the obligations of the notifying party, so far as they are affected by the force majeure, shall be suspended during, but not longer than, the continuance of the force majeure, and the notifying party agrees to use reasonable diligence to remove the force majeure as quickly as possible.  This paragraph shall not relieve either party hereto for its obligations to expend sums of money or to indemnify the other party hereto, as provided elsewhere in this Agreement. The term "force majeure" as herein employed shall mean an act of God, strike, lockout or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, extreme weather conditions, or governmental restraint.

15.             INFORMATION CONFIDENTIAL:

Upon written request by the Partnership, information obtained by Contractor in the conduct of drilling operation on the Partnership Wells, including, but not limited to depth, formations penetrated, the results of coring, testing and surveying, shall be considered confidential and shall not be divulged by Contractor or its employees, to any person, firm or any corporation other than the Partnership’s designated representative.

16.             NOTICES AND PLACE OF PAYMENT:

All notices to be given with respect to this Agreement unless otherwise provided for shall be given to Contractor and to the Partnership respectively at the addresses hereinabove shown.  All sums payable hereunder to Contractor shall be payable at the address hereinabove shown unless otherwise specified herein.

4

BAYOU CITY EXPLORATION, INC.
By:	/s/ Charles T. Bukowski, Jr.
	Charles T. Bukowski, Jr., President & CEO
2011-C Bayou City Offset Drilling Program, L.P.,
A KENTUCKY LIMITED PARTNERSHIP
By:	Bayou City Exploration, Inc.
	Managing General Partner
By:	/s/ Stephen C. Larkin
	Stephen C. Larkin, Chief Financial Officer

5

EXHIBIT "1" TO EXHIBIT "C"

April 28, 2011

The primary investment objective of the Partnership is, assuming all Units are sold, the acquisition of up to 5% Working Interest, which is approximately 3.75% of the Net Revenue Interest in one offset well to be drilled on the Glasscock Ranch Prospect (the “Kleimann #1 Well”). The Glasscock Ranch Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands and the Stratigraphic Lower Wilcox formations.

6

EX-10.3

Exhibit 10.3

LIMITED PARTNERSHIP

AGREEMENT

OF

2011-D Bayou City Two Well Drilling Program, L.P.

TABLE OF CONTENTS

Section	Page
1.  The Partnership	1
1.1  Definitions	1
1.2  Organization	5
1.3  Partnership Name	5
1.4  Character of Business	5
1.5  Principal Place of Business	5
1.6  Term of Partnership	5
1.7  Filings	6
1.8  Independent Activities	6
2.  Capitalization	6
2.1  Capital Contributions of the Managing General Partner and Initial Limited Partner	6
2.2  Capital Contributions of the Partners	7
2.3  Additional Capital Contributions	7
2.4  No Interest on Capital Contributions, No Withdrawals	7
3.  Capital Accounts and Allocations	7
3.1  Capital Accounts	7
3.2  Allocation of Profits and Losses and Costs and Expenses	9
3.3  Depletion	10
3.4  Apportionment Among Partners	11
4.  Distributions	11
4.1  Time of Distribution	11
4.2  Distributions	11
4.3  Capital Account Deficits	11
5.  Activities	12
5.1  Management	12
5.2  Conduct of Operations	12
5.3  Acquisition and Sale of Leases	12
5.4  Title to Leases	13
5.5  Release, Abandonment, and Sale or Exchange of Properties	13
5.6  Certain Transactions With Managing General Partner or Affiliates	13
6.  Managing General Partner	13
6.1  Managing General Partner	13
6.2  Authority of Managing General Partner	14
6.3  Certain Restrictions on Managing General Partner's Power and Authority	15
6.4  Indemnification of Managing General Partner	15
6.5  Withdrawal	16
6.6  Tax Matters Partner	16

ii

TABLE OF CONTENTS

Section	Page
7.  Partners	16
7.1  Management	16
7.2  Assignment of Units	16
7.3  Prohibited Transfers	18
7.4  Withdrawal by Partners	18
7.5  Calling of Meetings	18
7.6  Voting Rights	18
7.7  Voting by Proxy	18
7.8  Conversion of Additional General Partner Units to Limited Partner Interests	18
7.9  Liability of Partners	19
8.  Books and Records	19
8.1  Books and Records	19
8.2  Reports	19
8.3  Bank Accounts	20
8.4  Federal Income Tax Elections	20
9.  Dissolution; Winding-Up	20
9.1  Dissolution	20
9.2  Liquidation	21
9.3  Winding-Up	21
10.  Power of Attorney	21
10.1  Managing General Partner as Attorney-in-Fact	21
10.2  Nature as Special Power	22
11.  Miscellaneous Provisions	22
11.1  Liability of Parties	22
11.2  Notices	23
11.3  Paragraph Headings, Section References	23
11.4  Severability	23
11.5  Sole Agreement	23
11.6  Applicable Law	23
11.7  Execution in Counterparts	23
11.8  Waiver of Action for Partition	23
11.9  Amendments	23
11.10  Substitution of Signature Pages	24
11.11  Incorporation by Reference	24

iii

LIMITED PARTNERSHIP AGREEMENT

OF

2011-D Bayou City Two Well Drilling Program, L.P.

This Limited Partnership Agreement (“Agreement”) is entered into and effective as of the 26^th day of May, 2011, by and between (i) Bayou City Exploration, Inc., a Nevada corporation, as the Managing General Partner and (ii) the Persons whose names are set forth on Exhibit A attached hereto, as Additional General Partners or as Limited Partners.

Recitals:

A. The Managing General Partner and the Initial Limited Partner formed a Kentucky limited partnership named 2011-D Bayou City Two Well Drilling Program, L.P. (“Partnership”) pursuant to the provisions of the Kentucky Revised Uniform Limited Partnership Act.

B. On the date hereof, the Additional General Partners and Limited Partners have been admitted to the Partnership.

C. The parties desire to enter into this Agreement to set forth their mutual understandings.

Agreement:

Now, Therefore, the parties hereby agree as follows:

1. The Partnership.

1.1 Definitions. Capitalized words and phrases used in this Agreement shall have the following meanings:

(a) “Act” shall mean the Kentucky Revised Uniform Limited Partnership Act, as amended from time to time (or any corresponding provisions of succeeding law).

(b) “Additional General Partner” shall mean a Partner who purchases Units as an additional general partner, and such Additional General Partner’s transferees and assigns who are admitted as a Substitute Partner. The term “Additional General Partners” shall not include such Partner who converts such Partner’s interest in the Partnership into a Limited Partner interest pursuant to Section 7.8.

(c) “Affiliate” of a specified Person shall mean (a) any Person directly or indirectly owing, controlling, or holding with power to vote 10% or more of the outstanding voting securities of such specified Person; (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; (d) any officer, director, trustee or partner of such specified Person, and (e) if such specified Person is an officer, director, trustee or partner, any Person for which such Person acts in any such capacity.

(d) “Agreement” shall mean this Limited Partnership Agreement, as amended from time to time.

(e) “Capital Account” shall mean, with respect to any Partner, the capital account maintained for such Partner pursuant to Section 3.1.

(f) “Capital Contribution” shall mean the total contributions made by a Partner to the capital of the Partnership pursuant to Section 2.

1

(g) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law).

(h) “Depreciation” shall mean, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for Federal income tax purposes, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the Federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the Federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner.

(i) “Distributable Cash” shall mean for any period the excess, if any, of (A) the sum of (i) all gross receipts from any sources (including loan proceeds) for such period, other than from Capital Contributions, plus (ii) any funds released by the Managing General Partner from previously established reserves (referred to in (B)(ii) below), over (B) the sum of (i) all cash expenditures of the Partnership for such period not funded by Capital Contributions or paid out of previously established reserves (referred to in (B)(ii) below), plus (ii) a reasonable reserve for future expenditures as determined by the Managing General Partner.

(j) “General Partners” shall mean the Additional General Partners and the Managing General Partner.

(k) “Gross Asset Value” shall mean, with respect to any asset, the asset’s adjusted basis for Federal income tax purposes, except as follows:

(1) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership;

(2) The Gross Asset Value of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership of property in consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the Managing General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(3) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and

(4) The Gross Asset Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section 3.2(g); provided, however, that Gross Asset Value shall not be adjusted pursuant to this Section 1.1(k)(4) to the extent the Managing General Partner determines that an adjustment pursuant to Section 1.1(k)(2) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.1(k)(4).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Sections 1.1(k)(1), 1.1(k)(2), or 1.1(k)(4), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

(l) “Initial Limited Partner” shall mean Stephen C. Larkin or any successor to the Initial Limited Partner’s interest in the Partnership.

2

(m) “Lease” shall mean full or partial interests in: (i) undeveloped oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner thereof to drill for, reduce to possession, and produce oil and gas.

(n) “Limited Partner” shall mean a Partner who purchases Units as a Limited Partner, such Limited Partner’s transferee or assignee who is admitted as a Substitute Partner, and an Additional General Partner who converts their interest to a Limited Partner interest pursuant to the provisions of this Agreement.

(o) [Intentionally omitted]

(p) “Managing General Partner” shall mean Bayou City Exploration, Inc. or its successor, in its capacity as the Managing General Partner.

(q) “Nonrecourse Liability” shall have the meaning set forth in Treas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).

(r) “Oil and Gas Interest” shall mean any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to such royalties, leases, or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of such production or the proceeds thereof.

(s) “Operating Costs” shall mean expenditures made and costs incurred in producing and marketing oil or gas from the completed well, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges, and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations.

(t) “Organization and Offering Fee” shall mean the fee to which the Managing General Partner is entitled pursuant to Section 6.7.

(u) “Participant List” shall mean an alphabetical list of the names, addresses and business telephone numbers of the Partners, along with the number of Units held by each of them.

(v) “Partner Minimum Gain” shall mean partner nonrecourse debt minimum gain within the meaning of Treas. Reg. Section 1.704-2(i)(3).

(w) “Partner Nonrecourse Debt” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(4).

(x) “Partner Nonrecourse Deductions” shall have the meaning set forth in Treas. Reg. Section 1.704-2(i)(2).

(y) “Partners” shall mean the Managing General Partner, the Initial Limited Partner, and the Partners.

(z) “Partner” shall mean any Person other than the Managing General Partner and Initial Limited Partner (i) whose name is set forth on Exhibit A attached hereto as an Additional General Partner or as a Limited Partner, or who has been admitted as an additional or Substitute Partner pursuant to the terms of this Agreement, and (ii) who is the owner of one or more Units.

(aa) “Partnership” shall mean the 2011-D Bayou City Two Well Drilling Program, L.P. formed by the Partners pursuant to the Act and governed by this Agreement.

(bb) “Partnership Minimum Gain” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(2).

3

(cc) “Partnership Property” shall mean up to 5% Working Interest, which is approximately 3.75% of the Net Revenue Interest in one well to be drilled on the Prairie Bell West Prospect (the “Prairie Bell West Prospect Well”) and up to 5.0% Working Interest, which is approximately 3.75% of the Net Revenue Interest, in one well to be drilled on the Prairie Bell East Prospect (the “Prairie Bell East Prospect Well”). The Prairie Bell West Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands formation. The Prairie Bell East Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands formations.

(dd) “Partnership Wells” shall mean the Partnership well sites on the Partnership Property which consists of oil and gas leases in Colorado County, Texas.

(ee) “Permitted Transfer” shall mean any transfer of Units satisfying the provisions of Section 7.2.

(ff) “Person” shall mean any individual, partnership, corporation, limited liability company, trust, or other entity.

(gg) “Placement Memorandum” shall mean that Private Placement Memorandum pursuant to which the Units are being offered and sold.

(hh) “Profits” and “Losses” shall mean, for each fiscal year or other period, an amount equal to the Partnership’s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(1) Any income of the Partnership that is exempt from Federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be added to such taxable income or loss;

(2) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be subtracted from such taxable income or loss;

(3) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Sections 1.1(k)(2) or 1.1(k)(4), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purpose of computing Profits or Losses;

(4) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.1(h); and

(6) Notwithstanding any other provisions of this Section 1.1(hh), any items which are specially allocated pursuant to this Agreement shall not be taken into account in computing Profits or Losses.

4

(ii) “Prospect” shall mean a contiguous Oil and Gas Interest, upon which drilling operations may be conducted. In general, a Prospect is an area in which the Partnership owns or intends to own one or more Oil and Gas Interests which is geographically defined on the basis of geological and geophysical data by the Managing General Partner and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A “prospect” with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a horizon containing proved reserves.

(jj) “Subscription Agreement” shall mean the agreement attached to the Placement Memorandum as Exhibit D, pursuant to which an investor subscribes to Units in the Partnership.

(kk) “Substitute Partner” shall mean any Person admitted to the Partnership as a Partner pursuant to Section 7.2(c).

(ll) “TMP” shall mean the tax matters partner of the Partnership for purposes of Code Sections 6621 through 6233.

(mm) “Unit” shall mean an interest of a Partner in the Partnership, each Unit representing a commitment to make a Capital Contribution of up to $95,000 to the Partnership.

(nn) “Working Interest” shall mean an interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance.

1.2 Organization. The Managing General Partner and the Initial Limited Partner formed the Partnership pursuant to the provisions of the Act. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement.

1.3 Partnership Name. The name of the Partnership shall be the “2011-D Bayou City Two Well Drilling Program, L.P.” and all business of the Partnership shall be conducted in such name. The Managing General Partner may change the name of the Partnership upon ten days notice to the Partners.

1.4 Character of Business. The principal business of the Partnership shall be to acquire leases, drill sites, and other interests in oil and/or gas properties and to drill for oil, gas, hydrocarbons, and other minerals located in, on, or under such properties, to produce and sell oil, gas, hydrocarbons, and other minerals from such properties, and to invest and generally engage in any and all phases of the oil and gas business. Such business purpose shall include, without limitation, the purchase, sale, acquisition, disposition, exploration, development, operation, and production of oil and gas properties of any character. Without limiting the foregoing, Partnership activities may be undertaken as principal, agent, general partner, syndicate member, partner, participant, or otherwise.

1.5 Principal Place of Business. The principal place of business of the Partnership shall be at 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101. The Managing General Partner may change the principal place of business of the Partnership to any other place within the Commonwealth of Kentucky upon ten days notice to the Partners.

1.6 Term of Partnership. The Partnership commenced upon the filing of its Certificate of Limited Partnership, and shall continue until terminated as provided in Section 9.1.

5

1.7 Filings.

(a) A Certificate of Limited Partnership has been filed with the State of Kentucky in accordance with the provisions of the Act. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of Kentucky. The Managing General Partner shall cause amendments to the Certificate of Limited Partnership to be filed whenever required by the Act.

(b) The Managing General Partner shall execute and cause to be filed all such documents and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership qualified to do business in any other states or jurisdictions in which the Partnership engages in business.

(c) Upon the dissolution of the Partnership, the Managing General Partner shall promptly execute and cause to be filed a Certificate of Cancellation in accordance with the Act and all such other documents as may be necessary for the Partnership to withdraw from any other states or jurisdictions in which the Partnership has qualified to do business.

1.8 Independent Activities. Each General Partner and each Limited Partner may, notwithstanding this Agreement, engage in whatever activities they choose, whether the same are competitive with the Partnership or otherwise, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner. Except as otherwise provided herein, however, the Managing General Partner and its Affiliates may pursue business opportunities that are consistent with the Partnership’s investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Neither this Agreement, nor any activity undertaken pursuant hereto, shall prevent the Managing General Partner from engaging in such activities, or require the Managing General Partner to permit the Partnership or any Partner to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by the Managing General Partner and the admission of each Partner, each Partner hereby waives, relinquishes, and renounces any such right or claim of participation. Notwithstanding the foregoing, the Managing General Partner still has a fiduciary obligation to the Partners.

2. Capitalization.

2.1 Capital Contributions of the Managing General Partner and Initial Limited Partner.

(a) The Managing General Partner shall make a Capital Contribution in cash to the Partnership of an amount equal to 10% of the aggregate Capital Contributions of the Partners. In consideration of making such Capital Contribution, becoming the Managing General Partner, subjecting its assets to the liabilities of the Partnership, and undertaking other obligations as herein set forth, the Managing General Partner shall receive the interest in the Partnership provided herein.

(b) On or before the date hereof, the Initial Limited Partner shall contribute $100 in cash to the capital of the Partnership. Upon the earlier to occur of (i) the conversion of an Additional General Partner’s interest into a Limited Partner interest, or (ii) the admission of another Limited Partner to the Partnership, the Partnership shall redeem in full, without interest or deduction, the Initial Limited Partner’s Capital Contribution, and the Initial Limited Partner shall cease to be a Partner.

6

2.2 Capital Contributions of the Partners.

(a) The interests of the Partners (other than the Managing General Partner) have been divided into 10 units (“Units”) for which each such Partner shall commit to contribute Ninety-Five Thousand Dollars ($95,000) per full Unit. Upon execution of this Agreement, each initial Partner (whose names and addresses and number of Units for which the Partner has subscribed are set forth in Exhibit A) shall contribute to the capital of the Partnership the sum of $62,500 for each full Unit purchased. In the event that the Managing General Partner determines, in its sole discretion, that completion of the Prospect Wells (as defined in the Placement Memorandum) is advisable, each initial Partner shall contribute to the capital of the Partnership the additional sum of $13,650 for the Prairie Bell West Prospect Well and $18,850 for the Prairie Bell East Prospect Well for each full Unit purchased. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay the additional Capital Contribution required to be made by such Partner within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

(b) Except as provided in Section 4.3, any proceeds of the offering of Units for sale pursuant to the Placement Memorandum not used, committed for use, or reserved as operating capital in the Partnership’s operations within one year after the closing of such offering shall be distributed pro rata to the Partners as a return of capital.

(c) Until proceeds from the offering of Units are invested in the Partnership’s operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments where there is appropriate safety of principal, such as U.S. Treasury obligations, certificate of deposits or money market accounts. Any such income shall be allocated pro rata to the Partners providing such Capital Contributions.

2.3 Additional Capital Contributions. After all Capital Contributions made pursuant to Sections 2.1 and 2.2 have been expended, if the Managing General Partner determines that additional capital is required for the Partnership’s business, the Managing General Partner shall give notice thereof to each of the Partners, and each of the Partners shall be obligated to make an additional Capital Contribution pro rata in accordance with the Capital Contributions previously made by each of them. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay an additional Capital Contribution required to be made by such Partner or that portion of the amount required to be contributed by the Partners pursuant to Sections 2.1 and 2.2 within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

2.4 No Interest on Capital Contributions, No Withdrawals. No interest shall be paid on any Capital Contributions and, except as otherwise provided herein, no Partner, other than the Initial Limited Partner as authorized herein, may withdraw the Partner’s Capital Contribution.

3. Capital Accounts and Allocations.

3.1 Capital Accounts.

(a) A separate Capital Account shall be established and maintained for each Partner on the books and records of the Partnership. A Partner shall have a single Capital Account even though the Partner may be both a General Partner and a Limited Partner. Capital Accounts shall be maintained in accordance with Treas. Reg. Section 1.704-1(b) and any inconsistency between the provisions of this Section 3.1 and such regulation shall be resolved in favor of such regulation. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with such regulation, the Managing General Partner may make such modification provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 9.3 upon the dissolution of the Partnership. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership’s balance sheet, as computed for book purposes, in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treas. Reg. Section 1.704-1(b).

7

(b) Each Partner’s Capital Account shall be credited with (i) the amount of money contributed by such Partner to the Partnership; (ii) the amount of any Partnership liabilities that are assumed by such Partner (within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)); (iii) the Gross Asset Value of property contributed by such Partner to the Partnership (net of liabilities secured by such contributed property that the Partnership is considered to assume or take subject to under Code Section 752); and (iv) allocations to such Partner of Profits (or items thereof), including income and gain exempt from tax and income and gain described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value).

(c) Each Partner’s Capital Account shall be debited with (i) the amount of money distributed to such Partner by the Partnership; (ii) the amount of such Partner’s individual liabilities that are assumed by the Partnership (other than liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership); (iii) the Gross Asset Value of property distributed to such Partner by the Partnership (net of liabilities secured by such distributed property that such Partner is considered to assume or take subject to under Code Section 752); (iv) allocations to such Partner of expenditures of the Partnership not deductible in computing Partnership taxable income and not properly chargeable to capital account (as described in Code Section 705(a)(2)(B)), and (v) allocations to such Partner of Losses (or item thereof), including Losses and deductions described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but excluding items described in (iv) above and excluding Losses or deductions described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to excess percentage depletion).

(d) Solely for purposes of maintaining the Capital Accounts:

(1) Each year the Partnership shall compute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each Oil and Gas Interest using that method, as between the cost depletion method and the percentage depletion method (without regard to the limitations of Code Section 613A(c)(3) which theoretically could apply to any Partner), which results in the greatest simulated depletion allowance. The simulated depletion allowance with respect to each Oil and Gas Interest shall reduce the Partners’ Capital Accounts in the same proportion as the Partners were allocated adjusted basis with respect to such Oil and Gas Interest under Section 3.3(a). In no event shall the Partnership’s aggregate simulated depletion allowance with respect to an Oil and Gas Interest exceed the Partnership’s adjusted basis in the Oil and Gas Interest (maintained solely for Capital Account purposes).

(2) Upon the taxable disposition of an Oil and Gas Interest by the Partnership, the Partnership shall determine the simulated (hypothetical) gain or loss with respect to such Oil and Gas Interest (solely for Capital Account purposes) by subtracting the Partnership’s simulated adjusted basis for the Oil and Gas Interest sold (maintained solely for Capital Account purposes) from the amount realized by the Partnership upon such disposition. Simulated adjusted basis shall be determined by reducing the adjusted basis by the aggregate simulated depletion charged to the Capital Accounts of all Partners in accordance with Section 3.1(d)(1). The Capital Accounts of the Partners shall be adjusted upward by the amount of any simulated gain on such disposition in proportion to such Partners’ allocable share of the portion of total amount realized from the disposition of such Oil and Gas Interest that exceeds the Partnership’s simulated adjusted basis in such Oil and Gas Interest. The Capital Accounts of the Partners shall be adjusted downward by the amount of any simulated loss in proportion to such Partners’ allocable shares of the total amount realized from the disposition of such Oil and Gas Interest that represents recovery of the Partnership’s simulated adjusted basis in such Oil and Gas Interest.

8

(e) Except as otherwise provided in this Agreement, neither a Partner nor the Initial Limited Partner shall be obligated to the Partnership or to any other Partner to restore any negative balance in their Capital Accounts. Upon liquidation of the Partnership, or the liquidation of the interest of the Managing General Partner (in each case determined as provided in Treas. Reg. Section 1.704-1(b)(2)(ii)(g), if the Managing General Partner has a deficit balance in its Capital Account after crediting all Profit upon the sale of the Partnership’s assets which have been sold, and after making all allocations provided for herein, then the Managing General Partner shall be obligated to contribute to the Partnership, on or before the later to occur of (i) the close of the Partnership’s taxable year, or (ii) 90 days following such liquidation, an amount equal to such deficit balance for distribution in accordance with the terms of this Agreement.

3.2 Allocation of Profits and Losses and Costs and Expenses.

(a) Except as provided in this Section 3.2 or in Section 3.3, the following shall apply:

(1) Profits and Losses of the Partnership (computed without regard to the items referred to in Sections 3.2(a)(2) and 3.2(a)(3)) shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(2) Costs and expenses shall be allocated as follows:

(i) Organizational, syndication, and intangible drilling and development costs and expenses shall be allocated 90% to the Partners and 10% to the Managing General Partner;

(ii) Tangible drilling and development costs and expenses shall be allocated 90% to the Partners and 10% to the Managing General Partner; and

(iii) Operating Costs shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(3) All items of revenue or income attributable to the Partnership shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(b) Notwithstanding anything to the contrary in Section 3.3.2(a), no Partner shall be allocated any item to the extent that such allocation would create or increase a deficit in such Partner’s Capital Account. For purposes of this Section 3.2(b), in determining whether an allocation would create or increase a deficit in an Partner’s Capital Account, such Capital Account shall be reduced for those items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts which such Partner is obligated to restore in accordance with Treas. Reg. Section 1.704-1(b)(2)(ii)(c), or is deemed obligated to restore pursuant to Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Any item, the allocation of which to any Partner is prohibited by this Section 3.2(b), shall be reallocated to those Partners not having a deficit in their Capital Accounts (as adjusted as provided in this Section 3.2(b)) in the proportion that the positive balance of each such Partner’s adjusted Capital Account bears to the aggregate balance of all such Partners’ adjusted Capital Accounts, with any remaining losses or deductions being allocated to the Managing General Partner. Notwithstanding the provisions of Section 3.2(a), to the extent items are allocated to the Partners by virtue of the preceding provisions of this Section 3.2(b), the Profits thereafter recognized shall be allocated to such Partners (in proportion to the items previously allocated to them pursuant to this Section 3.2(b)) until such time as the Profits allocated to them pursuant to this sentence equals the items allocated to them pursuant to the preceding provisions of this Section 3.2(b).

(c) In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate (to the extent required by the regulations) the deficit balance in such Partner’s Capital Account (as adjusted in accordance with the provisions of Section 3.2(b)) as quickly as possible; provided, however, that an allocation pursuant to this Section 3.2(c) shall be made if and only to the extent that such Partner would have a deficit Capital Account (as adjusted in Section 3.2(b)) after all other allocations provided for in Section 3 have been tentatively made as if this Section 3.2(c) were not in this Agreement. It is the intention of the Partners that the provisions of this Section 3.2(c) constitute a “qualified income offset” within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), and such provisions shall be so construed.

9

(d) Notwithstanding any other provision of this Section 3.2, if there is a net decrease in Partnership Minimum Gain during any taxable year, all Partners shall be allocated items of Partnership income and gain for that year equal to that Partner’s share (within the meaning of Treas. Reg. Section 1.704-2(g)(2)) of the net decrease in Partnership Minimum Gain. Notwithstanding the preceding sentence, no such chargeback shall be made to the extent one or more of the exceptions and/or waivers provided for in Treas. Reg. Section 1.704-2(f) applies. This Section 3.2(d) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(f) and shall be interpreted consistently therewith.

(e) Notwithstanding any other provision of this Section 3.2, other than Section 3.2(d), if there is a net decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during any Partnership fiscal year, rules

similar to those contained in Section 3.2(d) shall apply in a manner consistent with Treas. Reg. Section 1.704-2(i)(4). This Section 3.2(e) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(f) Any Partner Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section 1.704-2(i)(1).

(g) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Sections 734(b) or 743(b) is required, pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such regulation.

(h) Notwithstanding anything in this Section 3.2, if as a result of the regulatory allocations provided for in Sections 3.2(c) through 3.2(f) the Managing General Partner determines that the Capital Accounts of the Partners do not reflect the economic agreement among the parties, the Managing General Partner, in its discretion, may adjust the allocations provided for in Section 3.2(a) so that the Capital Accounts of the Partners will be equal to the amount they would have been equal to had such regulatory allocations not been a part of this Agreement.

(i) The Partners are aware of the income tax consequences of the allocations made by this Section 3.2 and hereby agree to be bound by the provisions of this Section 3.2 in reporting their shares of Partnership income and loss for income tax purposes.

(j) For purposes of Code Section 752 and the regulations thereunder, the excess nonrecourse liabilities of the Partnership (within the meaning of Treas. Reg. Section 1.752-3(a)(3)), if any, shall be allocated 90% to the Partners and 10% to the Managing General Partner.

3.3 Depletion.

(a) The depletion deduction with respect to each Oil and Gas Interest of the Partnership shall be computed separately by each Partner in accordance with Code Section 613A(c)(7)(D) for Federal income tax purposes. For purposes of such computation, the adjusted basis of each Oil and Gas Interest shall be allocated in accordance with the Partners’ interests in the capital of the Partnership.

10

(b) Upon the taxable disposition of an Oil or Gas Interest by the Partnership, the amount realized therefrom shall be allocated among the Partners (for purposes of calculating their individual gain or loss on such disposition for Federal income tax purposes) as follows:

(1) The portion of the total amount realized upon the taxable disposition of such property that represents recovery of its simulated adjusted tax basis therein (as calculated pursuant to Section 3.1(d)) shall be allocated to the Partners in the same proportion as the aggregate adjusted basis of such property was allocated to such Partners (or their predecessors in interest) pursuant to Section 3.3(a); and

(2) The portion of the total amount realized upon the taxable disposition of such property that represents the excess over the simulated adjusted tax basis therein shall be allocated in accordance with the provisions of Section 3.1(d) as if such gain constituted an item of Profit.

3.4 Apportionment Among Partners.

(a) Except as otherwise provided in this Agreement, all allocations and distributions to the Partners shall be apportioned among them pro rata based upon the number of Units held by each of the Partners.

(b) For purposes of Section 3.4(a), a Partner’s pro rata share in Units shall be calculated as of the end of the taxable year for which such allocation has been made; provided, however, that if a transferee of a Unit is admitted as a Partner during the course of the taxable year, the apportionment of allocations and distributions between the transferor and transferee of such Unit shall be made in the manner provided in Section 3.4(c).

(c) If, during any taxable year of the Partnership, there is a change in any Partner’s interest in the Partnership, each Partner’s allocation of any item of income, gain, loss, deduction, or credit of the Partnership for such taxable year shall be determined by taking into account the varying interests of the Partners pursuant to such method as is permitted by Code Section 706(d) and the regulations thereunder.

4. Distributions.

4.1 Time of Distribution. The Managing General Partner shall distribute the Partnership’s Distributable Cash at such time as it shall determine, but such distributions shall be made not less frequently than quarterly.

4.2 Distributions. Except as provided in Section 4.3, all distributions (other than those made in connection with the liquidation of the Partnership, which distributions shall be made in accordance with Section 9.3) shall be made 90% to the Partners (and proportionally among them based upon their ownership of Units) and 10% to the Managing General Partner. In no event shall funds be advanced or borrowed for purposes of distributions if the amount of such distributions would exceed the Partnership’s accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied.

4.3 Capital Account Deficits. No distributions shall be made to any Partner to the extent such distribution would create or increase a deficit in such Partner’s Capital Account (as adjusted in Section 3.2(b)). If a distribution is not made to a Partner by reason of the preceding sentence, then the amount which would have been distributed to such Partner shall be distributed to the other Partners in the proportion that the positive Capital Account balance of each Partner bears to the aggregate positive Capital Account balances of all of the Partners. Any such amount remaining after reduction of all Capital Accounts to zero shall be distributed to the Managing General Partner.

11

5. Activities.

5.1 Management. The Managing General Partner shall conduct, direct, and exercise full and exclusive control over all activities of the Partnership. Partners shall have no power over the conduct of the affairs of the Partnership or otherwise commit or bind the Partnership in any manner. The Managing General Partner shall manage the affairs of the Partnership in a prudent and businesslike fashion and shall use its best efforts to carry out the purposes and character of the business of the Partnership.

5.2 Conduct of Operations.

(a) The Partners agree to participate in the Partnership’s program of operations as established by the Managing General Partner; provided, however, that no well drilled to the point of setting casing need be completed if, in the Managing General Partner’s opinion, such well is unlikely to be productive of oil or gas in quantities sufficient to justify the expenditures required for well completion. The Partnership may participate with others in the drilling of wells and it may enter into partnerships or other such arrangements.

(b) The Partnership shall not participate in any joint operations on any co-owned Lease unless there has been acquired or reserved on behalf of the Partnership the right to take in kind or separately dispose of its proportionate share of the oil and gas produced from such Lease, exclusive of production which may be used in development and production operations on the Lease and production unavoidably lost, and, if the Managing General Partner is the operator of such Lease, the Managing General Partner shall enter into written agreements with every other person or entity owning any working or operating interest reserving to such person or entity a similar right to take in-kind so as not to result in the Partnership being treated as a member of an association taxable as a corporation for Federal income tax purposes.

(c) The relationship of the Partnership and the Managing General Partner (or an Affiliate retaining or acquiring an interest) as co-owners in Leases, except to the extent superseded by an operating agreement consistent with the provisions of Section 5.2(c), and except to the extent inconsistent with this Agreement, shall be governed by the AAPL Form 610 Model Operating Agreement-1989, with a provision reserving the right to take production in-kind, naming the Partnership as a non-operator, and with the accounting procedure to govern as the accounting procedures under such operating agreements.

(d) The Managing General Partner is not expected to act as the operator of the Partnership Wells, and the Managing General Partner may designate such other persons as it deems appropriate to conduct the actual drilling and producing operations of the Partnership.

(e) The Partnership shall enter into a Turnkey Drilling Contract with the Managing General Partner or its Affiliates as described in the Placement Memorandum.

(f) The funds of the Partnership shall not be commingled with the funds of any other Person.

(g) The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner’s possession or control, and shall not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Partnership.

5.3 Acquisition and Sale of Leases.

(a) To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner or its Affiliate, the remainder of the interest in such Lease may be held by the Managing General Partner or such Affiliate, as applicable, which may retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner or its Affiliate to the exclusion of the Partnership. Any Leases acquired by the Partnership from the Managing General Partner or its Affiliate shall be acquired at the fair market value of such property.

12

(b) The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership’s best interest.

5.4 Title to Leases.

(a) Record title to each Lease acquired by the Partnership may be temporarily held in the name of the Managing General Partner, or in the name of any nominee designated by the Managing General Partner, as agent for the Partnership until a productive well is completed on a Lease. Thereafter, record title to Leases shall be assigned to and placed in the name of the Partnership.

(b) The Managing General Partner shall take the necessary steps in its best judgment to render title to the Leases to be assigned to the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on any Prospect acquired by the Partnership unless the Managing General Partner is satisfied that the undertaking of such operation would be in the best interest of Partners and the Partnership. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or Partners for any mistakes of judgment unless such mistakes were made in a manner not in accordance with general industry standards in the geographic area. Neither the Managing General Partner nor its Affiliates shall be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to any Lease assigned to the Partnership or the extent of the interest covered thereby.

5.5 Release, Abandonment, and Sale or Exchange of Properties. Except as provided elsewhere in Section 5 and in Section 6.3, the Managing General Partner shall have full power to dispose of the production and other assets of the Partnership, including the power to determine which Leases shall be released or permitted to terminate, those wells to be abandoned, whether any Lease or well shall be sold or exchanged, and the terms therefor.

5.6 Certain Transactions With Managing General Partner or Affiliates. Any services, equipment, or supplies which the Managing General Partner or an Affiliate furnishes to the Partnership which is not specifically referred to herein shall be furnished at a competitive rate which could be obtained in the geographical area of operations. Any such services for which the Managing General Partner or an Affiliate is to receive compensation shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid.

6. Managing General Partner.

6.1 Managing General Partner. The Managing General Partner shall have the sole and exclusive right and power to manage and control the affairs of and to operate the Partnership, to do all things necessary to carry on the business of the Partnership for the purposes described in Section 1.4 and to conduct the activities of the Partnership as set forth in Section 5. No financial institution or any other person, firm, or corporation dealing with the Managing General Partner shall be required to ascertain whether the Managing General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm, or corporation shall be protected in relying solely upon the deed, transfer, or assurance of, and the execution of such instrument or instruments by, the Managing General Partner. The Managing General Partner shall devote so much of its time to the business of the Partnership as in its judgment the conduct of the Partnership’s business shall reasonably require and shall not be obligated to do or perform any act or thing in connection with the business of the Partnership not expressly set forth herein. The Managing General Partner may engage in business ventures of any nature and description independently or with others and neither the Partnership nor any of the Partners shall have any rights in and to such independent ventures or the income or profits derived therefrom.

13

6.2 Authority of Managing General Partner. The Managing General Partner is specifically authorized and empowered, on behalf of the Partnership, and by consent of the Partners herein given, to do any act, execute any document or enter into any contract or any agreement of any nature necessary or desirable, in the opinion of the Managing General Partner, in pursuance of the purposes of the Partnership. Without limiting the generality of the foregoing, in addition to any and all other powers conferred upon the Managing General Partner pursuant to this Agreement and the Act, and except as otherwise prohibited by law or hereunder, the Managing General Partner shall have the power and authority to:

(a) Acquire Leases and other Oil and Gas Interests in furtherance of the Partnership’s business;

(b) Enter into and execute pooling agreements, farm out agreements, operating agreements, unitization agreements, dry and bottom hole and acreage contribution letters, construction contracts, and any and all documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, or operation of Oil and Gas Interests, and all other instruments deemed by the Managing General Partner to be necessary or appropriate to the proper operation of Oil or Gas Interests or to effectively and properly perform its duties or exercise its powers hereunder;

(c) Make expenditures and incur any obligations it deems necessary to implement the purposes of the Partnership, employ and retain such personnel as it deems desirable for the conduct of the Partnership’s activities, including employees, consultants, and attorneys and exercise on behalf of the Partnership, in such manner as the Managing General Partner, in its sole judgment, deems best, all rights, elections, and obligations granted to or imposed upon the Partnership;

(d) Manage, operate, and develop any Partnership property, and enter into operating agreements and other agreements with respect to properties acquired by the Partnership, including an operating agreement and turnkey drilling contract with the Managing General Partner as described in the Placement Memorandum, which agreements may contain such terms, provisions, and conditions as are usual and customary within the industry and as the Managing General Partner shall approve;

(e) Compromise, sue, or defend any and all claims in favor of or against the Partnership;

(f) Subject to the provisions of Section 8.4, make or revoke any election permitted the Partnership by any taxing authority;

(g) Perform any and all acts it deems necessary or appropriate for the protection and preservation of Partnership assets;

(h) Maintain, at the expense of the Partnership, such insurance coverage for public liability, fire and casualty, and any and all other insurance necessary or appropriate to the business of the Partnership in such amounts and of such types as it shall determine from time to time;

(i) Buy, sell, or lease property or assets on behalf of the Partnership;

(j) Enter into agreements to hire services of any kind or nature;

(k) Assign interests in properties to the Partnership;

(l) Enter into soliciting dealer agreements and perform all of the Partnership’s obligations thereunder, to issue and sell Units pursuant to the terms and conditions of this Agreement, the Subscription Agreements, and the Placement Memorandum, to accept and execute on behalf of the Partnership Subscription Agreements, and to admit Partners and Substitute Partners; and

14

(m) Perform any and all acts, and execute any and all documents, it deems necessary or appropriate to carry out the purposes of the Partnership.

6.3 Certain Restrictions on Managing General Partner’s Power and Authority. Notwithstanding any other provisions of this Agreement to the contrary, neither the Managing General Partner nor any of its Affiliates shall have the power or authority to, and shall not, do, perform, or authorize any of the following:

(a) Without having first received the prior consent of the holders of a majority of the then outstanding Units entitled to vote,

(1) sell all, or substantially all, of the assets of the Partnership (except upon liquidation of the Partnership pursuant to Section 9), unless cash funds of the Partnership are insufficient to pay the obligations and other liabilities of the Partnership;

(2) dispose of the goodwill of the Partnership; or

(3) do any other act which would make it impossible to carry on the ordinary business of the Partnership;

(b) Bind or obligate the Partnership with respect to any matter outside the scope of the Partnership business;

(c) Use the Partnership name, credit, or property for other than Partnership purposes;

(d) Utilize Partnership funds to invest in the securities of another Person except in the following instances:

(1) investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership’s business;

(2) temporary investments made in compliance with Section 2.2(c);

(3) investments which are a necessary and incidental part of a property acquisition transaction; and

(4) investments in entities established solely to limit the Partnership’s liabilities associated with the ownership or operation of property or equipment; provided, however, that in such instances duplicative fees and expenses shall be prohibited.

(e) Sell, transfer, or assign its interest (except for a collateral assignment which may be granted to a bank or other financial institution) in the Partnership, or any part thereof, or otherwise withdraw as Managing General Partner without written notice to the Partners.

6.4 Indemnification of Managing General Partner. The Managing General Partner shall have no liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that such course of conduct was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that such course of conduct did not constitute gross negligence or willful misconduct of the Managing General Partner. The Managing General Partner shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, and amounts paid in settlement of any claims sustained by it in connection with the Partnership, provided that the Managing General Partner has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that the same were not the result of gross negligence or willful misconduct on the part of the Managing General Partner. Indemnification of the Managing General Partner is recoverable only from the tangible net assets of the Partnership, including the insurance proceeds from the Partnership’s insurance policies and the insurance and indemnification of the Partnership’s subcontractors, and is not recoverable from the Partners.

15

6.5 Withdrawal.

(a) Notwithstanding the limitations contained in Section 6.3(e), the Managing General Partner shall have the right, by giving written notice to the Partners, to substitute in its stead as Managing General Partner any successor entity or any entity controlled by the Managing General Partner, and the Partners, by execution of this Agreement, hereby expressly consent to such a transfer unless it would adversely affect the status of the Partnership as a partnership for Federal income tax purposes.

(b) The Managing General Partner may voluntarily withdraw from the Partnership after written notice to the Partners.

(c) In the event a Managing General Partner withdraws and the Partners elect to continue the Partnership, the withdrawing Managing General Partner’s interest in the assets of the Partnership shall be determined by independent appraisal by a qualified independent petroleum engineering consultant who shall be selected by mutual agreement of the Managing General Partner and the successor Managing General Partner. Such appraisal will take into account an appropriate discount to reflect the risk of recovery of oil and gas reserves. The withdrawn Managing General Partner shall be paid for its interest within ten days of the determination of the value of such interest.

6.6 Tax Matters Partner. The Managing General Partner shall serve as the Tax Matters Partner for purposes of Code Sections 6221 through 6233. The Partnership may engage its accountants and/or attorneys to assist the Tax Matters Partner in discharging its duties hereunder.

6.7 Organization and Offering Fee. The Partnership shall pay the Managing General Partner an Organization Fee of up to $10,556.

7. Partners.

7.1 Management. No Partner shall take part in the control or management of the business or transact any business for the Partnership, and no Partner shall have the power to sign for or bind the Partnership, all of such authority having been given to the Managing General Partner in Section 6. Any action or conduct of Partners on behalf of the Partnership is hereby expressly prohibited. Any Partner who violates the provisions of this Section 7.1 shall be liable to the remaining Partners, the Managing General Partner, and the Partnership for any damages, costs, or expenses any of them may incur as a result of such violation. Partners shall have the right to vote only with respect to those matters specifically provided for in these Sections.

7.2 Assignment of Units.

(a) A Partner may transfer all or any portion of the Partner’s Units, subject to the following conditions:

(1) No such assignment shall be made if, in the opinion of counsel to the Partnership, such assignment would cause the termination of the Partnership for federal income tax purposes under Section 708 of the Code or might result in a change in the status of the Partnership to a “publicly traded partnership” within the meaning of Section 7704 of the Code, or if in the opinion of counsel to the Partnership such assignment may not be effected without registration under the Securities Act of 1933, as amended, or would result in the violation of any applicable state securities laws;

16

(2) Except in the case of a transfer of Units at death, as a result of adjudication of incompetency or insanity, or involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Partnership such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such transfer;

(3) The transferor and transferee shall furnish the Partnership with the transferee’s taxpayer identification number and sufficient information to determine the transferee’s initial tax basis in the Units transferred;

(4) The Partnership is reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such transfer; and

(5) If the transferor is an Additional General Partner, the Managing General Partner has consented to the transfer, which shall be in the sole discretion of the Managing General Partner.

(b) A Person who acquires one or more Units but who is not admitted as a Substitute Partner, shall only be entitled to allocations and distributions with respect to such Units in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of an Additional General Partner or a Limited Partner under the Act or this Agreement.

(c) Subject to the other provisions of Section 7, a transferee of Units may be admitted to the Partnership as a Substitute Partner only upon satisfaction of the following conditions:

(1) The Managing General Partner consents to such admission, which consent can be withheld in its absolute discretion;

(2) The Units with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer;

(3) The transferee becomes a party to this Agreement as a Partner and executes such documents and instruments as the Managing General Partner may reasonably request as may be necessary or appropriate to confirm such transferee as a Partner of the Partnership and such transferee’s agreement to be bound by the terms and conditions hereof; and

(4) If the transferee is not an individual of legal majority, the transferee provides the Partnership with evidence satisfactory to counsel for the Partnership of the authority of the transferee to become a Partner and to be bound by the terms and conditions of this Agreement.

(d) In any calendar quarter in which a transfer of a Unit occurs, the Partnership shall recognize the assignment not later than the last day of the calendar month following receipt of notice of assignment and required documentation.

(e) Each Partner hereby covenants and agrees with the Partnership, for the benefit of the Partnership and all Partners, that (i) the Partner is not currently making a market in Units and (ii) the Partner will not transfer any Unit on an established securities market or a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any regulations, proposed regulations, revenue rulings, or other official pronouncements of the Internal Revenue Service that may be promulgated or published thereunder). Each Partner further agrees that the Partner will not transfer any Unit to any Person unless such Person agrees to be bound by the provisions of this Section 7.2 and to transfer such Units only to Persons who agree to be similarly bound.

17

7.3 Prohibited Transfers.

(a) Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no effect whatever. If, however, the Partnership is required by a court of competent jurisdiction to recognize a transfer that is not a Permitted Transfer (or if the Managing General Partner, in its sole discretion, elects to recognize a transfer that is not a Permitted Transfer), the Partnership shall have the right (without limiting any other legal or equitable rights of the Partnership) to withhold distributions to which such transferee would otherwise be entitled and apply such distributions to satisfy the debts, obligations, or liabilities for damages that the transferor or transferee of such Units may have to the Partnership.

(b) In the case of a transfer or attempted transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such transfer shall be liable to indemnify and hold harmless the Partnership and the other Partners from all cost, liability, and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby.

7.4 Withdrawal by Partners. A Partner may not withdraw from the Partnership, except as otherwise provided in this Agreement.

7.5 Calling of Meetings. Partners owning 20% or more of the then outstanding Units entitled to vote shall have the right to request that the Managing General Partner call a meeting of the Partners. The Managing General Partner shall call such a meeting and shall deposit in the United States mails within 15 days after receipt of such request written notice to all Partners of the meeting and the purpose of the meeting, which shall be held on a date not less than 30, nor more than 60, days after the date of the mailing of such notice, at a reasonable time and place. Partners shall have the right to submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of Partners for consideration and approval by the Partners. Partners shall have the right to vote in person or by proxy.

7.6 Voting Rights. Partners shall be entitled to all voting rights granted to them under this Agreement and as specified by the Act. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Except as otherwise provided herein, at any meeting of Partners, a vote of a majority of Units represented at such meeting, in person or by proxy, with respect to matters considered at the meeting at which a quorum is present shall be required for approval of any such matters.

7.7 Voting by Proxy. The Partners may vote either in person or by proxy.

7.8 Conversion of Additional General Partner Units to Limited Partner Interests.

(a) Automatic Conversion. After the Partnership Wells have been drilled and completed, the Managing General Partner shall file an amended certificate of limited partnership with the Secretary of State of the state of Kentucky for the purpose of converting the Additional General Partner Units to Limited Partners interests.

(b) Additional General Partners Shall Have Contingent Liability. Upon conversion the Additional General Partners shall be Limited Partners entitled to limited liability; however, they shall remain liable to the Partnership for any additional Capital Contribution required for their proportionate share of any Partnership obligation or liability arising before the conversion of their Units as provided in Section 3.05(b)(2).

(c) Conversion Shall Not Affect Allocations. The conversion shall not affect the allocation to any Participant of any item of Partnership income, gain, loss, deduction or credit or other item of special tax significance other than Partnership liabilities, if any. Further, the conversion shall not affect any Participant’s interest in the Partnership’s oil and gas properties and unrealized receivables.

18

(d) Right to Convert if Reduction of Insurance. Notwithstanding the foregoing, the Managing General Partner shall notify all Participants at least 30 days before the effective date of any adverse material change in the Partnership’s insurance coverage. If the insurance coverage is to be materially reduced, then the Additional General Partners shall have the right to convert their Units into Limited Partner interests before the reduction by giving written notice to the Managing General Partner.

7.9 Liability of Partners. Except as otherwise provided in this Agreement or the Act, each Additional General Partner shall be jointly and severally liable for the debts and obligations of the Partnership. In addition, each Additional General Partner shall be jointly and severally liable for any wrongful acts or omissions of the Managing General Partner and/or the misapplication of money or property of a third party by the Managing General Partner acting within the scope of its apparent authority to the extent such acts or omissions are chargeable to the Partnership.

8. Books and Records.

8.1 Books and Records.

(a) For accounting and income tax purposes, the Partnership shall operate on a calendar year.

(b) The Managing General Partner shall keep just and true records and books of account with respect to the operations of the Partnership and shall maintain and preserve during the term of the Partnership and for four years thereafter all such records, books of account, and other relevant Partnership documents. The Managing General Partner shall maintain for at least six years all records necessary to substantiate the fact that Units were sold only to purchasers for whom such Units were suitable. Such books shall be maintained at the principal place of business of the Partnership and shall be kept on the accrual method of accounting.

(c) The Managing General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership’s business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including the names and addresses of Partners, books of account, and records of Partnership proceedings, may be kept on any electronic information storage device; provided, however, that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books and records of the Partnership shall be made available for review by any Partner or the Partner’s representative at any reasonable time.

(d) The Participant List shall be maintained as a part of the books and records of the Partnership and shall be available for the inspection by any Partner or such Partner’s designated agent at the principal office of the Partnership upon the request of any Partner and shall be updated at least quarterly to reflect changes in the information contained therein.

8.2 Reports. The Managing General Partner shall deliver to each Partner the following financial statements and reports at the times indicated below:

(a) By March 15 of each year, a report containing such information as to enable each Partner to prepare and file such Partner’s Federal income tax return.

(b) Such other reports and financial statements as the Managing General Partner shall determine from time to time.

19

8.3 Bank Accounts. All funds of the Partnership shall be deposited in such separate bank account or accounts, short term obligations of the U.S. Government or its agencies, or other interest-bearing investments and money market or liquid asset mutual funds as shall be determined by the Managing General Partner. All withdrawals therefrom shall be made upon checks signed by the Managing General Partner or any person authorized to do so by the Managing General Partner.

8.4 Federal Income Tax Elections.

(a) Except as otherwise provided in this Section 8.4, all elections required or permitted to be made by the Partnership under the Code shall be made by the Managing General Partner in its sole discretion. Each Partner agrees to provide the Partnership with all information necessary to give effect to any election to be made by the Partnership.

(b) The Partnership shall elect to currently deduct intangible drilling and development costs as an expense for income tax purposes and shall require any partnership, joint venture, or other arrangement in which it is a party to make such an election.

9. Dissolution; Winding-Up.

9.1 Dissolution.

(a) Except as otherwise provided herein, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, or bankruptcy of any Partner shall not dissolve the Partnership. The successor to the rights of such Partner shall have all the rights of an Partner for the purpose of settling or administering the estate or affairs of such Partner; provided, however, that no successor shall become a Substitute Partner except in accordance with Section 7; and provided further that upon the occurrence of any of the events referred to in the first sentence of this Section 9.1(a) with respect to an Additional General Partner, the Partnership shall be dissolved and wound up unless at that time there is at least one other Additional General Partner, in which event the business of the Partnership shall continue to be carried on. Neither the expulsion of any Partner, nor the admission or substitution of an Partner, shall work a dissolution of the Partnership. The estate of a deceased, insane, incompetent, or bankrupt Partner shall be liable for all his liabilities as a Partner.

(b) Notwithstanding anything in the Act to the contrary, the Partnership shall be dissolved upon, but not before, the earliest to occur of (i) the written consent of the Managing General Partner and Partners owning a majority of the then outstanding Units to dissolve and wind up the affairs of the Partnership; (ii) subject to the provisions of Section 9.1(c), the retirement, withdrawal, removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in the case of a corporate Managing General Partner, the withdrawal, removal, filing of a certificate of dissolution, liquidation, or bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or abandonment of all, or substantially all, of the Partnership’s property and the sale and/or collection of any evidences of indebtedness received in connection therewith; (iv) December 31, 2061 or (v) a dissolution event described in Section 9.1(a).

(c) In the case of any event described in Section 9.1(b)(ii), if a successor Managing General Partner is selected by Partners owning a majority of the then outstanding Units within 90 days after such event, and if such Partners agree within such 90 day period to continue the business of the Partnership, then the Partnership shall not be dissolved.

(d) If, notwithstanding the provisions of this Agreement, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a Partner’s interest in the Partnership, or the substitution or admission of a new Partner, shall be deemed under the Act to cause a dissolution of the Partnership, then, except as provided in Section 9.1(c), the remaining Partners may, in accordance with the Act, continue the Partnership business as a new partnership and all such remaining Partners agree to be bound by the provisions of this Agreement.

20

9.2 Liquidation. Upon a dissolution of the Partnership, the Managing General Partner, or in the event there is no Managing General Partner, any other Person selected by the Partners to act as the liquidator, shall cause the affairs of the Partnership to be wound up and shall take account of the Partnership’s assets (including Capital Contributions, if any, of the Managing General Partner pursuant to Section 3.1(e)) and, subject to the provisions of Section 9.3(b) shall be liquidated as promptly as is consistent with obtaining the fair market value thereof (which dissolution and liquidation may be accomplished over a period spanning one or more tax years in the sole discretion of the Managing General Partner or the liquidator), and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in accordance with Section 9.3.

9.3 Winding-Up.

(a) Upon the dissolution of the Partnership and winding up of its affairs, the assets of the Partnership shall be distributed as follows:

(1) all of the Partnership’s debts and liabilities to Persons other than to Partners shall be paid and discharged;

(2) to the establishment of any cash reserves which the Managing General Partner or liquidator determines to create in their sole discretion for unmatured and/or contingent liabilities or obligations of the Partnership; and

(3) to the Partners, in accordance with their respective Capital Accounts; provided, however, that if the Managing General Partner or liquidator establishes any reserves in accordance with the provisions of Section 9.3(a)(2), then the distributions pursuant to this Section 9.3(a)(3) (including distribution of any released reserves) shall be pro rata in accordance with the balances of the Partners’ Capital Accounts.

(b) Distributions pursuant to Section 9.3 shall be made in cash or in kind to the Partners, at the election of the Managing General Partner. Notwithstanding the provision of this Section 9.3(b), in no event shall the Partners reserve the right to take in kind and separately dispose of their share of production.

(c) Any in kind property distributions to the Partners shall be made to a liquidating trust or similar entity for the benefit of the Partners, unless at the time of the distribution:

(1) the Managing General Partner shall offer the individual Partners the election of receiving in kind property distributions and the Partners accept such offer after being advised of the risks associated with such direct ownership; or

(2) there are alternative arrangements in place which assure the Partners that they will not, at any time, be responsible for the operation or disposition of Partnership properties.

10. Power of Attorney.

10.1 Managing General Partner as Attorney-in-Fact. Each Partner makes, constitutes, and appoints the Managing General Partner their true and lawful attorney-in-fact, with full power of substitution, in the name, place, and stead of the Partner, from time to time to make, execute, sign, acknowledge, and file:

(a) Any notices or certificates as may be required under the Act and under the laws of any other state or jurisdiction in which the Partnership shall engage, or seek to engage, to do business and to do such other acts as are required to constitute the Partnership as a limited partnership under such laws.

21

(b) Any amendment to the Agreement pursuant to and which complies with Section 11.9.

(c) Such certificates, instruments, and documents as may be required by, or may be appropriate under the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business.

(d) Such certificates, instruments, and documents as may be required by, or as may be appropriate for the Partner to comply with, the laws of any state or other jurisdiction to reflect a change of name or address of the Partner.

(e) Such certificates, instruments, and documents as may be required to be filed with the Department of Interior (including any bureau, office or other unit thereof, whether in Washington, D.C. or in the field, or any officer or employee thereof), as well as with any other federal or state agencies, departments, bureaus, offices, or authorities and pertaining to (i) any and all offers to lease, Leases (including amendments, modifications, supplements, renewals, and exchanges thereof) of, or with respect to, any lands under the jurisdiction of the United States or any state including, without limitation, lands within the public domain, and acquired lands, and provides for the leasing thereof, (ii) all statements of interest and holdings on behalf of the Partnership or the Partner; (iii) any other statements, notices, or communications required or permitted to be filed or which may hereafter be required or permitted to be filed under any law, rule, or regulation of the United States, or any state relating to the leasing of lands for oil or gas exploration or development, (iv) any request for approval of assignments or transfers of oil and gas Leases, any unitization or pooling agreements and any other documents relating to lands under the jurisdiction of the United States or any state; and (v) any other documents or instruments which said attorney-in-fact, in its sole discretion, shall determine should be filed.

(f) Any further document, including furnishing verified copies of this Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider necessary or convenient in connection with any of the foregoing, hereby giving said attorney-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the foregoing as fully as the undersigned might and could do if personally present, and hereby ratifying and confirming all that said attorney-in-fact shall lawfully do to cause to be done by virtue hereof.

10.2 Nature as Special Power. The foregoing grant of authority:

(a) is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incompetency of the Partner granting it;

(b) shall survive the delivery of any assignment by the Partner of the whole or any portion of the Partner’s Units; except that where the assignee thereof has been approved by the Managing General Partner for admission to the Partnership as a Substitute Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file any instrument necessary to effect such substitution; and

(c) may be exercised by said attorney-in-fact by a listing of all of the Partners executing any instrument with a single signature of said attorney-in-fact.

11. Miscellaneous Provisions.

11.1 Liability of Parties. By entering into this Agreement, no party shall become liable for any other party’s obligations relating to any activities beyond the scope of this Agreement, except as provided by the Act. If any party suffers, or is held liable for, any loss or liability of the Partnership which is in excess of that agreed upon herein, such party shall be indemnified by the other parties, to the extent of their respective interests in the Partnership, as provided herein.

22

11.2 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed or sent by registered or certified mail, postage and charges prepaid, addressed as follows (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section):

(a) If to the Managing General Partner, 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

(b) If to a Partner, at such Partner’s address for purposes of notice which is set forth on Exhibit A attached hereto. Unless otherwise expressly set forth in this Agreement to the contrary, any such notice shall be deemed to be given on the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid.

11.3 Paragraph Headings, Section References. The headings in the Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. All references herein to Sections shall refer to Sections of this Agreement unless the context clearly requires otherwise.

11.4 Severability. Every portion of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement.

11.5 Sole Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly approved and executed by the Managing General Partner and such percentage of Partners as provided in Section 11.9.

11.6 Applicable Law. This Agreement, shall be governed by, and construed in accordance with, the laws of the State of Kentucky without regard to its conflict of law rules.

11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had all signed the same document. All counterparts shall be construed together and shall constitute one agreement.

11.8 Waiver of Action for Partition. Each Partner irrevocably waives, during the term of the Partnership, any right that such Partner may have to maintain any action for partition with respect to the Partnership and the property of the Partnership.

11.9 Amendments.

(a) Unless otherwise specifically herein provided, this Agreement shall not be amended without the consent of Partners owning a majority of the then outstanding Units entitled to vote.

(b) The Managing General Partner may, without notice to, or consent of, any Partner, amend any provisions of this Agreement, or consent to and execute any amendment to this Agreement, to reflect:

(1) A change in the name or location of the principal place of business of the Partnership;

(2) The admission of Substitute Partners or additional Partners in accordance with this Agreement;

23

(3) A reduction in, return of, or withdrawal of, all or a portion of any Partner’s Capital Contribution;

(4) A correction of any typographical error or omission;

(5) A change which is necessary in order to qualify the Partnership as a limited partnership under the laws of any other state or which is necessary or advisable, in the opinion of the Managing General Partner, to ensure that the Partnership will be treated as a partnership and not as an association taxable as a corporation for Federal income tax purposes;

(6) A change in the allocation provisions, in accordance with the provisions of Section 3.2(a), in a manner that, in the sole opinion of the Managing General Partner (which opinion shall be determinative), would result in the most favorable aggregate consequences to the Partners as nearly as possible consistent with the allocations contained herein, for such allocations to be recognized for Federal income tax purposes due to developments in the Federal income tax laws or otherwise; or

(7) Any other amendment similar to the foregoing; provided however, that the Managing General Partner shall have no authority, right, or power under this Section 11.9(b) to amend the voting rights of the Partners.

11.10 Substitution of Signature Pages. This Agreement has been executed in duplicate by the Partners and one executed copy of the signature page is attached to the Partner’s copy of this Agreement. It is agreed that the other executed copy of such signature page may be attached to an identical copy of this Agreement together with the signature pages from counterpart Agreements which may be executed by other Partners.

11.11 Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference.

24

2011-D Bayou City Two Well Drilling Program, L.P.

PARTNERSHIP AGREEMENT SIGNATURE PAGE

__________ Number of Units of Limited Partnership interest

__________ Number of Units of General Partnership interest

__________	Cash Payment - $95,000 per Unit to be paid as follows:
	$62,500 payable upon subscription for the drilling and testing of the Partnership Wells. (Payable to “AB & T, Escrow Agent for the 2011-D Bayou City Two Well Drilling Program, L.P.”)
	$13,650 payable when the Managing General Partner decides to complete the Prairie Bell West Prospect Well (Payable to “2011-D Bayou City Two Well Drilling Program, L.P.”)
	$18,850 payable when the Managing General Partner decides to complete the Prairie Bell East Prospect Well (Payable to “2011-D Bayou City Two Well Drilling Program, L.P.”)

REGISTRATION INFORMATION

Print Name	Print Name of Joint Owner (if applicable)
Social Security Number or Tax ID Number	Social Security Number or Tax ID Number
Drivers License Number	Drivers License Number
X	X
Signature	Signature of Joint Owner
Mailing Address:	SELLING BROKER/DEALER’S ACCEPTANCE
	Broker/Dealer:
	Date:
Home Ph #:	DEALER MANAGER’S ACCEPTANCE
Work Ph #:	Source Capital Group, Inc., as Dealer Manager, herewith accepts the foregoing subscription.
Email:
	Source Capital Group, Inc.
	Date:

Check One:			PARTNERSHIP’S ACCEPTANCE
	Individual	IRA
	J/T/W/R/O/S	Keogh	Bayou City Exploration, Inc., as Managing General
	Partnership	TIC	Partner, herewith accepts the foregoing
	Trust Created on _____	Corporation	subscription in the 2011-D Bayou
	Limited Liability	Community Property	City Two Well Drilling Program, L.P.
	Company
			Stephen C. Larkin, Chief Financial Officer
			Date:

25

EXHIBIT A

TO

AGREEMENT OF LIMITED PARTNERSHIP

OF

2011-D Bayou City Two Well Drilling Program, L.P.

Names and Addresses of Investors Nature of Interest Number of Units

26

EX-10.4

Exhibit 10.4

TURNKEY DRILLING CONTRACT

THIS AGREEMENT is made and entered into as of the 26^th day of May, 2011 by and between the parties herein designated as "Partnership" and "Contractor."

Partnership:	2011-D Bayou City Two Well Drilling Program, L.P.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101
Contractor:	Bayou City Exploration, Inc.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained, Partnership engages Contractor as an Independent Contractor to furnish the equipment, labor and services to drill, test, and complete its working interest portion, as per Exhibit “1”, of the wells to be drilled on the Partnership Prospects in Colorado County, Texas in search of oil and/or gas.

As a Management Fee for the supervision and management of the affairs of the Partnership during the work over, drilling and testing periods of Initial Operations, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Drilling Price over the actual cost of such operations. Likewise, during the completion period of Initial Operations, if completion is attempted on the Prospect Wells, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Completion Price over the actual costs of such operations. The Managing General Partner intends to enter into one or more Operating Agreements (the “Operating Agreements”) with third party operators which will perform certain services with respect to the work over, drilling, testing and, if applicable, completion of the Prospect Wells. We cannot accurately predict the actual amount constituting compensation to be paid to any third party operator for its services under the Operating Agreements and therefore, it also cannot accurately predict the excess amount, if any, of the Turnkey Drilling Price over the actual cost of such operations that the Managing General Partner will receive. Costs to be expended under the Operating Agreements are a direct result of the work over, drilling, testing and completion risks encountered. During work over, drilling, testing and completion operations, a variety of conditions may be encountered, such as loss of circulation, blowouts, detachment and/or loss of drilling equipment, necessity for the purchase and installation of down-hole equipment to keep the wellbore intact, and repair of inadequate cement to hold production casing in place. As such costs are unpredictable with any degree of certainty, in the event of totally uneventful operations, compensation payable pursuant to the Operating Agreements could equal or exceed the actual work over, drilling, testing and completion costs. Likewise, in the event that a series of major difficulties are encountered, these costs could equal or exceed the amount of Initial Capital, and Bayou City Exploration, Inc. would be responsible for such excess costs. Bayou City Exploration, Inc. may use any funds it receives from management fees and/or profits, if any, for any purpose, including payment of General and Administrative Expenses of Bayou City Exploration, Inc. such as employee salaries and office expenses.

1.             LOCATION OF PARTNERSHIP WELL(S):

See Exhibit "1" attached hereto and made a part hereof.

1

2.             TERMINATION DATE:

Contractor agrees to use its best efforts to complete operations for the acquisition, drilling and testing of the Partnership Wells by December 31, 2011, and Contractor and the Partnership agree that time is of the essence under this Agreement.

3.             BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:

Contractor shall be paid at the following rate for the work performed hereunder:

Turnkey Drilling Price ($593,750) and Completion Price in the event that completion is attempted ($308,750) = Total $902,500.

4.             DEPTH:

Subject to the right of the Partnership to direct the stoppage of work at any time (as provided in paragraph 7), the Partnership Wells shall be drilled to the depth as specified in Exhibit “1” or to the depth at which the production casing (production string) is set, whichever depth is first reached, which depth is hereinafter referred to as the “Contract Depth.”

5.             TIME OF PAYMENT:

5.1 Basis: Payment by the Partnership to the Contractor of the Drilling Price becomes due and payable upon the receipt by the Partnership of an invoice from the Contractor. Neither commencement nor completion of Contractor’s performance shall be a condition precedent to this obligation to pay.

5.2 Attorneys’ Fees: If this Agreement is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or probate proceedings, then the Partnership agrees that there shall be added to the amount due reasonable attorneys' fees and costs.

6.             COMPLETION PROGRAM:

The Contractor, in its capacity as Managing General Partner of the Partnership (the “Managing General Partner”), along with other participating Partnership Well working interest owners, shall determine whether Contractor shall set a production string on the Prospect Wells.  In the event the Managing General Partner directs that drilling operations cease and to abandon the Partnership Wells, Contractor shall plug the Partnership Wells, remove all drilling apparatus from the well sites and the obligations of the parties hereunder shall cease.  In the event the Managing General Partner directs Contractor to set a production string on the Prospect Wells and makes timely payment to the Contractor of the Completion Price, Contractor shall commence the operations necessary to attempt to complete the Prospect Wells for commercial production, including the setting of a production string and the acquisition, delivery and installation of a pump jack, holding tank and all other necessary equipment needed to extract and contain oil and/or gas from the Partnership Wells.

7.             STOPPAGE OF WORK BY THE PARTNERSHIP:

Notwithstanding the provisions of paragraph 3 with respect to the depth to be drilled, the Managing General Partner shall have the right to direct the stoppage of the work to be performed by the Contractor hereunder at any time prior to reaching the Contract Depth and even though Contractor has made no default hereunder.  If the Partnership exercises its right to discontinue drilling the well(s), the Partnership will not receive a refund for any unused portion of the Drilling Price allocable to the discontinued well(s).

2

8.             REPORTS TO BE FURNISHED BY CONTRACTOR:

8.1 Contractor shall keep and furnish to the Partnership an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report form or other form acceptable to the Partnership.  A legible copy of said form signed by Contractor’s representative shall be furnished by Contractor to the Partnership.

8.2 Delivery tickets, if requested by the Partnership, covering any material or supplies furnished by the Partnership shall be turned in each day with the daily drilling report.  The quantity, description and condition of materials and supplies so furnished shall be checked by Contractor and such tickets shall be properly certified by Contractor.

9.             RESPONSIBILITY FOR A SOUND LOCATION:

Contractor shall prepare a sound location, adequate in size and capable of properly supporting the drilling rig.  Contractor shall be responsible for a conductor pipe program adequate to prevent soil and subsoil washout.  In the event subsurface conditions cause a cratering or shifting of the location surface, and loss or damage to the rig or its associated equipment results therefrom, the Partnership shall not be responsible for reimbursing Contractor for any such loss or damage including payment of work stoppage rate during repair and/or demobilization if applicable.

10.           RESPONSIBILITY FOR ROAD AND LOCATIONS:

Contractor agrees at all times to maintain roads to locations and each location in such a condition that will allow free access and movement to and from the drilling site in an ordinarily equipped highway type vehicle.

11.           PAYMENT OF CLAIMS:

Contractor agrees to pay all claims for labor, material, services and supplies to be furnished by Contractor hereunder, and agrees to allow no lien or charge to be fixed upon the lease, the Partnership Wells or other property of the Partnership or the land upon which said Partnership Wells are located.

12.           RESPONSIBILITY FOR LOSS OR DAMAGE:

12.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times for damage to or destruction of Contractor’s surface equipment, including but not limited to all drilling tools, machinery and appliances, for use above the surface, regardless of when or how such damage or destruction occurs.

12.2 Contractor’s In-Hole Equipment Basis: Contractor shall assume liability at all times for damage to or destruction of Contractor’s in-hole equipment, including but not limited to drill pipe, drill collars and tool joints, and the Partnership shall be under no liability to reimburse Contractor for any such loss.

3

12.3 Partnership’s Equipment: The Partnership shall assume liability at all times for any defective equipment owned by it, including but not limited to casing, tubing, well head equipment, and Contractor shall be under no liability to reimburse the Partnership for any such loss or damage.

12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole for any cause attributable to Contractor's operators be lost or damaged while Contractor is engaged in the performance of work hereunder, all such loss of or damage to the hole including cost of regaining control of a fire or blowout, shall be borne by Contractor; and if the hole is not in condition to be carried to the Contract Depth as herein provided, Contractor shall, if requested by the Partnership, commence a new hole without delay at Contractor's cost; and the drilling of the new hole shall be conducted under the terms and conditions of this Agreement in the same manner as though it were the first hole and Contractor shall be responsible for replacement of any casing lost in a junked and abandoned hole as well as the cost of preparing a new drill site for the new hole and the road thereto.  In such case, Contractor shall not be entitled to any payment or compensation for expenditures made or incurred by Contractor on or in connection with the abandoned hole.

13.           NO WAIVER EXCEPT IN WRITING:

It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the party.

14.           FORCE MAJEURE:

If either party hereto is rendered unable, wholly or in part (and its performance hereunder is not rendered merely commercially impracticable) by force majeure to carry out its obligation under this Agreement, it shall give the other party prompt written notice of the force majeure with reasonably full particulars.  Thereupon, the obligations of the notifying party, so far as they are affected by the force majeure, shall be suspended during, but not longer than, the continuance of the force majeure, and the notifying party agrees to use reasonable diligence to remove the force majeure as quickly as possible.  This paragraph shall not relieve either party hereto for its obligations to expend sums of money or to indemnify the other party hereto, as provided elsewhere in this Agreement. The term "force majeure" as herein employed shall mean an act of God, strike, lockout or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, extreme weather conditions, or governmental restraint.

15.           INFORMATION CONFIDENTIAL:

Upon written request by the Partnership, information obtained by Contractor in the conduct of drilling operation on the Partnership Wells, including, but not limited to depth, formations penetrated, the results of coring, testing and surveying, shall be considered confidential and shall not be divulged by Contractor or its employees, to any person, firm or any corporation other than the Partnership’s designated representative.

16.           NOTICES AND PLACE OF PAYMENT:

All notices to be given with respect to this Agreement unless otherwise provided for shall be given to Contractor and to the Partnership respectively at the addresses hereinabove shown.  All sums payable hereunder to Contractor shall be payable at the address hereinabove shown unless otherwise specified herein.

4

BAYOU CITY EXPLORATION, INC.

By: /s/ Charles T. Bukowski

        Charles T. Bukowski, Jr., President & CEO

2011-D Bayou City Two Well Drilling Program, L.P.,

A KENTUCKY LIMITED PARTNERSHIP

By:  Bayou City Exploration, Inc.

        Managing General Partner

By: /s/ Stephen C. Larkin

        Stephen C. Larkin, Chief Financial Officer

5

EXHIBIT "1" TO EXHIBIT "C"

May 26, 2011

The primary investment objective of the Partnership is, assuming all Units are sold, the acquisition of up to 5% Working Interest, which is approximately 3.75% of the Net Revenue Interest in one well to be drilled on the Prairie Bell West Prospect (the “Prairie Bell West Prospect Well”) and up to 5.0% Working Interest, which is approximately 3.75% of the Net Revenue Interest, in one well to be drilled on the Prairie Bell East Prospect (the “Prairie Bell East Prospect Well”). The Prairie Bell West Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands formation. The Prairie Bell East Prospect will consist of oil and gas leases in Colorado County, Texas and will be drilled to a depth sufficient to test the Prairie Bell Sands formations.

6

EX-10.5

Exhibit 10.5

LIMITED PARTNERSHIP

AGREEMENT

OF

2012 Bayou City Year End Program, L.P.

TABLE OF CONTENTS

Section		Page
1.  The Partnership		1
	1.1  Definitions	1
	1.2  Organization	5
	1.3  Partnership Name	5
	1.4  Character of Business	5
	1.5  Principal Place of Business	6
	1.6  Term of Partnership	6
	1.7  Filings	6
	1.8  Independent Activities	6
2.  Capitalization		6
	2.1  Capital Contributions of the Managing General Partner and Initial Limited Partner	6
	2.2  Capital Contributions of the Partners	7
	2.3  Additional Capital Contributions	7
	2.4  No Interest on Capital Contributions, No Withdrawals	7
3.  Capital Accounts and Allocations		8
	3.1  Capital Accounts	8
	3.2  Allocation of Profits and Losses and Costs and Expenses	9
	3.3  Depletion	11
	3.4  Apportionment Among Partners	11
4.  Distributions		11
	4.1  Time of Distribution	11
	4.2  Distributions	11
	4.3  Capital Account Deficits	12
5.  Activities		12
	5.1  Management	12
	5.2  Conduct of Operations	12
	5.3  Acquisition and Sale of Leases	13
	5.4  Title to Leases	13
	5.5  Release, Abandonment, and Sale or Exchange of Properties	13
	5.6  Certain Transactions With Managing General Partner or Affiliates	13
6.  Managing General Partner		13
	6.1  Managing General Partner	13
	6.2  Authority of Managing General Partner	14
	6.3  Certain Restrictions on Managing General Partner's Power and Authority	15
	6.4  Indemnification of Managing General Partner	16
	6.5  Withdrawal	16
	6.6  Tax Matters Partner	16

ii

7.  Partners		16
	7.1  Management	16
	7.2  Assignment of Units	17
	7.3  Prohibited Transfers	18
	7.4  Withdrawal by Partners	18
	7.5  Calling of Meetings	18
	7.6  Voting Rights	18
	7.7  Voting by Proxy	18
	7.8  Conversion of Additional General Partner Units to Limited Partner Interests	19
	7.9  Liability of Partners	19
8.  Books and Records		19
	8.1  Books and Records	19
	8.2  Reports	20
	8.3  Bank Accounts	20
	8.4  Federal Income Tax Elections	20
9.  Dissolution; Winding-Up		20
	9.1  Dissolution	20
	9.2  Liquidation	21
	9.3  Winding-Up	21
10.  Power of Attorney		22
	10.1  Managing General Partner as Attorney-in-Fact	22
	10.2  Nature as Special Power	22
11.  Miscellaneous Provisions		23
	11.1  Liability of Parties	23
	11.2  Notices	23
	11.3  Paragraph Headings, Section References	23
	11.4  Severability	23
	11.5  Sole Agreement	23
	11.6  Applicable Law	23
	11.7  Execution in Counterparts	23
	11.8  Waiver of Action for Partition	23
	11.9  Amendments	24
	11.10  Substitution of Signature Pages	24
	11.11  Incorporation by Reference	24

iii

LIMITED PARTNERSHIP AGREEMENT

OF

2012 Bayou City Year End Program, L.P.

This Limited Partnership Agreement (this “Agreement”) is entered into and effective as of the 22^nd day of October 2012, by and between (i) Bayou City Exploration, Inc., a Nevada corporation, as the Managing General Partner and (ii) the Persons whose names are set forth on Exhibit A attached hereto, as Additional General Partners or as Limited Partners.

Recitals:

A. The Managing General Partner and the Initial Limited Partner formed a Kentucky limited partnership named 2012 Bayou City Year End Program, L.P. (“Partnership”) pursuant to the provisions of the Kentucky Revised Uniform Limited Partnership Act.

B. On the date hereof, the Additional General Partners and Limited Partners have been admitted to the Partnership.

C. The parties desire to enter into this Agreement to set forth their mutual understandings.

Agreement:

Now, Therefore, the parties hereby agree as follows:

1. The Partnership.

1.1 Definitions. Capitalized words and phrases used in this Agreement shall have the following meanings:

(a) “Act” shall mean the Kentucky Revised Uniform Limited Partnership Act, as amended from time to time (or any corresponding provisions of succeeding law).

(b) “Additional General Partner” shall mean a Partner who purchases Units as an additional general partner, and such Additional General Partner’s transferees and assigns who are admitted as a Substitute Partner. The term “Additional General Partners” shall not include such Partner who converts such Partner’s interest in the Partnership into a Limited Partner interest pursuant to Section 7.8.

(c) “Affiliate” of a specified Person shall mean (a) any Person directly or indirectly owing, controlling, or holding with power to vote 10% or more of the outstanding voting securities of such specified Person; (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; (d) any officer, director, trustee or partner of such specified Person, and (e) if such specified Person is an officer, director, trustee or partner, any Person for which such Person acts in any such capacity.

(d) “Agreement” shall mean this Limited Partnership Agreement, as amended from time to time.

(e) “Capital Account” shall mean, with respect to any Partner, the capital account maintained for such Partner pursuant to Section 3.1.

(f) “Capital Contribution” shall mean the total contributions made by a Partner to the capital of the Partnership pursuant to Section 2.

1

(g) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law).

(h) “Depreciation” shall mean, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for Federal income tax purposes, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the Federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the Federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner.

(i) “Distributable Cash” shall mean for any period the excess, if any, of (A) the sum of (i) all gross receipts from any sources (including loan proceeds) for such period, other than from Capital Contributions, plus (ii) any funds released by the Managing General Partner from previously established reserves (referred to in (B)(ii) below), over (B) the sum of (i) all cash expenditures of the Partnership for such period not funded by Capital Contributions or paid out of previously established reserves (referred to in (B)(ii) below), plus (ii) a reasonable reserve for future expenditures as determined by the Managing General Partner.

(j) “General Partners” shall mean the Additional General Partners and the Managing General Partner.

(k) “Gross Asset Value” shall mean, with respect to any asset, the asset’s adjusted basis for Federal income tax purposes, except as follows:

(1) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership;

(2) The Gross Asset Value of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership of property in consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the Managing General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(3) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and

(4) The Gross Asset Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section 3.2(g); provided, however, that Gross Asset Value shall not be adjusted pursuant to this Section 1.1(k)(4) to the extent the Managing General Partner determines that an adjustment pursuant to Section 1.1(k)(2) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.1(k)(4).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Sections 1.1(k)(1), 1.1(k)(2), or 1.1(k)(4), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

(l) “Initial Limited Partner” shall mean Stephen C. Larkin or any successor to the Initial Limited Partner’s interest in the Partnership.

2

(m) “Lease” shall mean full or partial interests in: (i) undeveloped oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner thereof to drill for, reduce to possession, and produce oil and gas.

(n) “Limited Partner” shall mean a Partner who purchases Units as a Limited Partner, such Limited Partner’s transferee or assignee who is admitted as a Substitute Partner, and an Additional General Partner who converts their interest to a Limited Partner interest pursuant to the provisions of this Agreement.

(o) [Intentionally omitted]

(p) “Managing General Partner” shall mean Bayou City Exploration, Inc. or its successor, in its capacity as the Managing General Partner.

(q) “Nonrecourse Liability” shall have the meaning set forth in Treas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).

(r) “Oil and Gas Interest” shall mean any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to such royalties, leases, or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of such production or the proceeds thereof.

(s) “Operating Costs” shall mean expenditures made and costs incurred in producing and marketing oil or gas from the completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges, and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations.

(t) “Organization and Offering Fee” shall mean the fee to which the Managing General Partner is entitled pursuant to Section 6.7.

(u) “Participant List” shall mean an alphabetical list of the names, addresses and business telephone numbers of the Partners, along with the number of Units held by each of them.

(v) “Partner Minimum Gain” shall mean partner nonrecourse debt minimum gain within the meaning of Treas. Reg. Section 1.704-2(i)(3).

(w) “Partner Nonrecourse Debt” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(4).

(x) “Partner Nonrecourse Deductions” shall have the meaning set forth in Treas. Reg. Section 1.704-2(i)(2).

(y) “Partners” shall mean the Managing General Partner, the Initial Limited Partner, and the Partners.

(z) “Partner” shall mean any Person other than the Managing General Partner and Initial Limited Partner (i) whose name is set forth on Exhibit A attached hereto as an Additional General Partner or as a Limited Partner, or who has been admitted as an additional or Substitute Partner pursuant to the terms of this Agreement, and (ii) who is the owner of one or more Units.

(aa) “Partnership” shall mean the 2012 Bayou City Year End Program, L.P. formed by the Partners pursuant to the Act and governed by this Agreement.

(bb) “Partnership Minimum Gain” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(2).

3

(cc) “Partnership Property” shall mean the acquisition of up to 2.5% Working Interest, which is approximately 2.0% of the Net Revenue Interest in one well to be drilled on the Galveston Bay Prospect (the “Galveston Bay Prospect Well”). The Galveston Bay Prospect will consist of oil and gas leases in Galveston County, Texas and will be drilled to a depth sufficient to test the Frio Ban Field #2 formation. In addition to the drilling program described above, the 2012 Bayou City Year End Program includes a $300,000 investment in the Opportunity Fund VII, LLC. The “Opportunity Fund” will remain open through December 31, 2012 and will be offered through participation in each drilling program. As each drilling program is sold out and completed, our partners benefit from the growth of the Fund in asset numbers and total value. The net effect is that partners will progress from owning a large percentage of a small number of assets to owning a small percentage of a large number of assets. Each addition to the Fund spreads the risk over a larger asset base throughout the Fund subscription period. The primary objective of the Opportunity Fund is to mitigate the risk associated with oil and gas investment. The Fund is a joint venture with Home Servicing, LLC of Baton Rouge, Louisiana and seeks to provide our partners with aggressive returns via investment in mortgage notes and land contracts purchased at significant discounts to existing balances. Greater details regarding this concept and the parties involved can be found herein.

(dd) “Partnership Well” shall mean the Partnership well site on the Partnership Property which consists of oil and gas leases in Galveston County, Texas.

(ee) “Permitted Transfer” shall mean any transfer of Units satisfying the provisions of Section 7.2.

(ff) “Person” shall mean any individual, partnership, corporation, limited liability company, trust, or other entity.

(gg) “Placement Memorandum” shall mean that Private Placement Memorandum pursuant to which the Units are being offered and sold.

(hh) “Profits” and “Losses” shall mean, for each fiscal year or other period, an amount equal to the Partnership=s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(1) Any income of the Partnership that is exempt from Federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be added to such taxable income or loss;

(2) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be subtracted from such taxable income or loss;

(3) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Sections 1.1(k)(2) or 1.1(k)(4), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purpose of computing Profits or Losses;

(4) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

4

(5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.1(h); and

(6) Notwithstanding any other provisions of this Section 1.1(hh), any items which are specially allocated pursuant to this Agreement shall not be taken into account in computing Profits or Losses.

(ii) “Prospect” shall mean a contiguous Oil and Gas Interest, upon which drilling operations may be conducted. In general, a Prospect is an area in which the Partnership owns or intends to own one or more Oil and Gas Interests which is geographically defined on the basis of geological and geophysical data by the Managing General Partner and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A “prospect” with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a horizon containing proved reserves.

(jj) “Subscription Agreement” shall mean the agreement attached to the Placement Memorandum as Exhibit D, pursuant to which an investor subscribes to Units in the Partnership.

(kk) “Substitute Partner” shall mean any Person admitted to the Partnership as a Partner pursuant to Section 7.2(c).

(ll) “TMP” shall mean the tax matters partner of the Partnership for purposes of Code Sections 6621 through 6233.

(mm) “Unit” shall mean an interest of a Partner in the Partnership, each Unit representing a commitment to make a Capital Contribution of up to $107,000 to the Partnership.

(nn) “Working Interest” shall mean an interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance.

1.2 Organization. The Managing General Partner and the Initial Limited Partner formed the Partnership pursuant to the provisions of the Act. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement.

1.3 Partnership Name. The name of the Partnership shall be the “2012 Bayou City Year End Program, L.P.” and all business of the Partnership shall be conducted in such name. The Managing General Partner may change the name of the Partnership upon ten days notice to the Partners.

1.4 Character of Business. The principal business of the Partnership shall be to acquire leases, drill sites, and other interests in oil and/or gas properties and to drill for oil, gas, hydrocarbons, and other minerals located in, on, or under such properties, to produce and sell oil, gas, hydrocarbons, and other minerals from such properties, and to invest and generally engage in any and all phases of the oil and gas business. Such business purpose shall include, without limitation, the purchase, sale, acquisition, disposition, exploration, development, operation, and production of oil and gas properties of any character. Without limiting the foregoing, Partnership activities may be undertaken as principal, agent, general partner, syndicate member, partner, participant, or otherwise. The Opportunity Fund has been established to purchase performing loans at significant discounts. The fund is intended to generate cash flow from the loans held and to reinvest that cash flow for compounding returns.

5

1.5 Principal Place of Business. The principal place of business of the Partnership shall be at 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101. The Managing General Partner may change the principal place of business of the Partnership to any other place within the Commonwealth of Kentucky upon ten days notice to the Partners.

1.6 Term of Partnership. The Partnership commenced upon the filing of its Certificate of Limited Partnership, and shall continue until terminated as provided in Section 9.1.

1.7 Filings.

(a) A Certificate of Limited Partnership has been filed with the State of Kentucky in accordance with the provisions of the Act. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of Kentucky. The Managing General Partner shall cause amendments to the Certificate of Limited Partnership to be filed whenever required by the Act.

(b) The Managing General Partner shall execute and cause to be filed all such documents and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership qualified to do business in any other states or jurisdictions in which the Partnership engages in business.

(c) Upon the dissolution of the Partnership, the Managing General Partner shall promptly execute and cause to be filed a Certificate of Cancellation in accordance with the Act and all such other documents as may be necessary for the Partnership to withdraw from any other states or jurisdictions in which the Partnership has qualified to do business.

1.8 Independent Activities. Each General Partner and each Limited Partner may, notwithstanding this Agreement, engage in whatever activities they choose, whether the same are competitive with the Partnership or otherwise, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner. Except as otherwise provided herein, however, the Managing General Partner and its Affiliates may pursue business opportunities that are consistent with the Partnership’s investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Neither this Agreement, nor any activity undertaken pursuant hereto, shall prevent the Managing General Partner from engaging in such activities, or require the Managing General Partner to permit the Partnership or any Partner to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by the Managing General Partner and the admission of each Partner, each Partner hereby waives, relinquishes, and renounces any such right or claim of participation. Notwithstanding the foregoing, the Managing General Partner still has a fiduciary obligation to the Partners.

2. Capitalization.

2.1 Capital Contributions of the Managing General Partner and Initial Limited Partner.

(a) The Managing General Partner shall make a Capital Contribution in cash to the Partnership of an amount equal to 1% of the aggregate Capital Contributions of the Partners. In consideration of making such Capital Contribution, becoming the Managing General Partner, subjecting its assets to the liabilities of the Partnership, and undertaking other obligations as herein set forth, the Managing General Partner shall receive the interest in the Partnership provided herein.

6

(b) On or before the date hereof, the Initial Limited Partner shall contribute $100 in cash to the capital of the Partnership. Upon the earlier to occur of (i) the conversion of an Additional General Partner’s interest into a Limited Partner interest, or (ii) the admission of another Limited Partner to the Partnership, the Partnership shall redeem in full, without interest or deduction, the Initial Limited Partner’s Capital Contribution, and the Initial Limited Partner shall cease to be a Partner.

2.2 Capital Contributions of the Partners.

(a) The interests of the Partners (other than the Managing General Partner) have been divided into 10 units (“Units”) for which each such Partner shall commit to contribute One Hundred Seven Thousand Dollars ($107,000). Upon execution of this Agreement, each initial Partner (whose names and addresses and number of Units for which the Partner has subscribed are set forth in Exhibit A) shall contribute to the capital of the Partnership the sum of $90,000 for each Unit purchased. In the event that the Managing General Partner determines, in its sole discretion, that completion of the Prospect Well (as defined in the Placement Memorandum) is advisable, each initial Partner shall contribute to the capital of the Partnership the additional sum of $17,000 for the Galveston Bay Prospect Well for each full Unit purchased. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay the additional Capital Contribution required to be made by such Partner within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

(b) Except as provided in Section 4.3, any proceeds of the offering of Units for sale pursuant to the Placement Memorandum not used, committed for use, or reserved as operating capital in the Partnership’s operations within one year after the closing of such offering shall be distributed pro rata to the Partners as a return of capital.

(c) Until proceeds from the offering of Units are invested in the Partnership’s operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments where there is appropriate safety of principal, such as U.S. Treasury obligations, certificate of deposits or money market accounts. Any such income shall be allocated pro rata to the Partners providing such Capital Contributions.

2.3 Additional Capital Contributions. After all Capital Contributions made pursuant to Sections 2.1 and 2.2 have been expended, if the Managing General Partner determines that additional capital is required for the Partnership’s business, the Managing General Partner shall give notice thereof to each of the Partners, and each of the Partners shall be obligated to make an additional Capital Contribution pro rata in accordance with the Capital Contributions previously made by each of them. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay an additional Capital Contribution required to be made by such Partner or that portion of the amount required to be contributed by the Partners pursuant to Sections 2.1 and 2.2 within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

2.4 No Interest on Capital Contributions, No Withdrawals. No interest shall be paid on any Capital Contributions and, except as otherwise provided herein, no Partner, other than the Initial Limited Partner as authorized herein, may withdraw the Partner’s Capital Contribution.

7

3. Capital Accounts and Allocations.

3.1 Capital Accounts.

(a) A separate Capital Account shall be established and maintained for each Partner on the books and records of the Partnership. A Partner shall have a single Capital Account even though the Partner may be both a General Partner and a Limited Partner. Capital Accounts shall be maintained in accordance with Treas. Reg. Section 1.704-1(b) and any inconsistency between the provisions of this Section 3.1 and such regulation shall be resolved in favor of such regulation. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with such regulation, the Managing General Partner may make such modification provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 9.3 upon the dissolution of the Partnership. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership=s balance sheet, as computed for book purposes, in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treas. Reg. Section 1.704-1(b).

(b) Each Partner’s Capital Account shall be credited with (i) the amount of money contributed by such Partner to the Partnership; (ii) the amount of any Partnership liabilities that are assumed by such Partner (within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)); (iii) the Gross Asset Value of property contributed by such Partner to the Partnership (net of liabilities secured by such contributed property that the Partnership is considered to assume or take subject to under Code Section 752); and (iv) allocations to such Partner of Profits (or items thereof), including income and gain exempt from tax and income and gain described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value).

(c) Each Partner’s Capital Account shall be debited with (i) the amount of money distributed to such Partner by the Partnership; (ii) the amount of such Partner’s individual liabilities that are assumed by the Partnership (other than liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership); (iii) the Gross Asset Value of property distributed to such Partner by the Partnership (net of liabilities secured by such distributed property that such Partner is considered to assume or take subject to under Code Section 752); (iv) allocations to such Partner of expenditures of the Partnership not deductible in computing Partnership taxable income and not properly chargeable to capital account (as described in Code Section 705(a)(2)(B)), and (v) allocations to such Partner of Losses (or item thereof), including Losses and deductions described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but excluding items described in (iv) above and excluding Losses or deductions described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to excess percentage depletion).

(d) Solely for purposes of maintaining the Capital Accounts:

(1) Each year the Partnership shall compute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each Oil and Gas Interest using that method, as between the cost depletion method and the percentage depletion method (without regard to the limitations of Code Section 613A(c)(3) which theoretically could apply to any Partner), which results in the greatest simulated depletion allowance. The simulated depletion allowance with respect to each Oil and Gas Interest shall reduce the Partners’ Capital Accounts in the same proportion as the Partners were allocated adjusted basis with respect to such Oil and Gas Interest under Section 3.3(a). In no event shall the Partnership’s aggregate simulated depletion allowance with respect to an Oil and Gas Interest exceed the Partnership’s adjusted basis in the Oil and Gas Interest (maintained solely for Capital Account purposes).

8

(2) Upon the taxable disposition of an Oil and Gas Interest by the Partnership, the Partnership shall determine the simulated (hypothetical) gain or loss with respect to such Oil and Gas Interest (solely for Capital Account purposes) by subtracting the Partnership’s simulated adjusted basis for the Oil and Gas Interest sold (maintained solely for Capital Account purposes) from the amount realized by the Partnership upon such disposition. Simulated adjusted basis shall be determined by reducing the adjusted basis by the aggregate simulated depletion charged to the Capital Accounts of all Partners in accordance with Section 3.1(d)(1). The Capital Accounts of the Partners shall be adjusted upward by the amount of any simulated gain on such disposition in proportion to such Partners= allocable share of the portion of total amount realized from the disposition of such Oil and Gas Interest that exceeds the Partnership’s simulated adjusted basis in such Oil and Gas Interest. The Capital Accounts of the Partners shall be adjusted downward by the amount of any simulated loss in proportion to such Partners’ allocable shares of the total amount realized from the disposition of such Oil and Gas Interest that represents recovery of the Partnership’s simulated adjusted basis in such Oil and Gas Interest.

(e) Except as otherwise provided in this Agreement, neither a Partner nor the Initial Limited Partner shall be obligated to the Partnership or to any other Partner to restore any negative balance in their Capital Accounts. Upon liquidation of the Partnership, or the liquidation of the interest of the Managing General Partner (in each case determined as provided in Treas. Reg. Section 1.704-1(b)(2)(ii)(g), if the Managing General Partner has a deficit balance in its Capital Account after crediting all Profit upon the sale of the Partnership’s assets which have been sold, and after making all allocations provided for herein, then the Managing General Partner shall be obligated to contribute to the Partnership, on or before the later to occur of (i) the close of the Partnership=s taxable year, or (ii) 90 days following such liquidation, an amount equal to such deficit balance for distribution in accordance with the terms of this Agreement.

3.2 Allocation of Profits and Losses and Costs and Expenses.

(a) Except as provided in this Section 3.2 or in Section 3.3, the following shall apply:

(1) Profits and Losses of the Partnership (computed without regard to the items referred to in Sections 3.2(a)(2) and 3.2(a)(3)) shall be allocated 99% to the Partners and 1% to the Managing General Partner.

(2) Costs and expenses shall be allocated as follows:

(i)                  Organizational, syndication, and intangible drilling and development costs and expenses shall be allocated 99% to the Partners and 1% to the Managing General Partner;

(ii)                Tangible drilling and development costs and expenses shall be allocated 99% to the Partners and 1% to the Managing General Partner; and

(iii)              Operating Costs shall be allocated 99% to the Partners and 1% to the Managing General Partner.

(3) All items of revenue or income attributable to the Partnership shall be allocated 99% to the Partners and 1% to the Managing General Partner.

9

(b) Notwithstanding anything to the contrary in Section 3.3.2(a), no Partner shall be allocated any item to the extent that such allocation would create or increase a deficit in such Partner’s Capital Account. For purposes of this Section 3.2(b), in determining whether an allocation would create or increase a deficit in an Partner’s Capital Account, such Capital Account shall be reduced for those items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts which such Partner is obligated to restore in accordance with Treas. Reg. Section 1.704-1(b)(2)(ii)(c), or is deemed obligated to restore pursuant to Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Any item, the allocation of which to any Partner is prohibited by this Section 3.2(b), shall be reallocated to those Partners not having a deficit in their Capital Accounts (as adjusted as provided in this Section 3.2(b)) in the proportion that the positive balance of each such Partner’s adjusted Capital Account bears to the aggregate balance of all such Partners’ adjusted Capital Accounts, with any remaining losses or deductions being allocated to the Managing General Partner. Notwithstanding the provisions of Section 3.2(a), to the extent items are allocated to the Partners by virtue of the preceding provisions of this Section 3.2(b), the Profits thereafter recognized shall be allocated to such Partners (in proportion to the items previously allocated to them pursuant to this Section 3.2(b)) until such time as the Profits allocated to them pursuant to this sentence equals the items allocated to them pursuant to the preceding provisions of this Section 3.2(b).

(c) In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate (to the extent required by the regulations) the deficit balance in such Partner’s Capital Account (as adjusted in accordance with the provisions of Section 3.2(b)) as quickly as possible; provided, however, that an allocation pursuant to this Section 3.2(c) shall be made if and only to the extent that such Partner would have a deficit Capital Account (as adjusted in Section 3.2(b)) after all other allocations provided for in Section 3 have been tentatively made as if this Section 3.2(c) were not in this Agreement. It is the intention of the Partners that the provisions of this Section 3.2(c) constitute a “qualified income offset” within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), and such provisions shall be so construed.

(d) Notwithstanding any other provision of this Section 3.2, if there is a net decrease in Partnership Minimum Gain during any taxable year, all Partners shall be allocated items of Partnership income and gain for that year equal to that Partner’s share (within the meaning of Treas. Reg. Section 1.704-2(g)(2)) of the net decrease in Partnership Minimum Gain. Notwithstanding the preceding sentence, no such chargeback shall be made to the extent one or more of the exceptions and/or waivers provided for in Treas. Reg. Section 1.704-2(f) applies. This Section 3.2(d) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(f) and shall be interpreted consistently therewith.

(e) Notwithstanding any other provision of this Section 3.2, other than Section 3.2(d), if there is a net decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during any Partnership fiscal year, rules

similar to those contained in Section 3.2(d) shall apply in a manner consistent with Treas. Reg. Section 1.704-2(i)(4). This Section 3.2(e) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(f) Any Partner Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section 1.704-2(i)(1).

(g) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Sections 734(b) or 743(b) is required, pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such regulation.

(h) Notwithstanding anything in this Section 3.2, if as a result of the regulatory allocations provided for in Sections 3.2(c) through 3.2(f) the Managing General Partner determines that the Capital Accounts of the Partners do not reflect the economic agreement among the parties, the Managing General Partner, in its discretion, may adjust the allocations provided for in Section 3.2(a) so that the Capital Accounts of the Partners will be equal to the amount they would have been equal to had such regulatory allocations not been a part of this Agreement.

10

(i) The Partners are aware of the income tax consequences of the allocations made by this Section 3.2 and hereby agree to be bound by the provisions of this Section 3.2 in reporting their shares of Partnership income and loss for income tax purposes.

(j) For purposes of Code Section 752 and the regulations thereunder, the excess nonrecourse liabilities of the Partnership (within the meaning of Treas. Reg. Section 1.752-3(a)(3)), if any, shall be allocated 99% to the Partners and 1% to the Managing General Partner.

3.3 Depletion.

(a) The depletion deduction with respect to each Oil and Gas Interest of the Partnership shall be computed separately by each Partner in accordance with Code Section 613A(c)(7)(D) for Federal income tax purposes. For purposes of such computation, the adjusted basis of each Oil and Gas Interest shall be allocated in accordance with the Partners’ interests in the capital of the Partnership.

(b) Upon the taxable disposition of an Oil or Gas Interest by the Partnership, the amount realized therefrom shall be allocated among the Partners (for purposes of calculating their individual gain or loss on such disposition for Federal income tax purposes) as follows:

(1) The portion of the total amount realized upon the taxable disposition of such property that represents recovery of its simulated adjusted tax basis therein (as calculated pursuant to Section 3.1(d)) shall be allocated to the Partners in the same proportion as the aggregate adjusted basis of such property was allocated to such Partners (or their predecessors in interest) pursuant to Section 3.3(a); and

(2) The portion of the total amount realized upon the taxable disposition of such property that represents the excess over the simulated adjusted tax basis therein shall be allocated in accordance with the provisions of Section 3.1(d) as if such gain constituted an item of Profit.

3.4 Apportionment Among Partners.

(a) Except as otherwise provided in this Agreement, all allocations and distributions to the Partners shall be apportioned among them pro rata based upon the number of Units held by each of the Partners.

(b) For purposes of Section 3.4(a), a Partner’s pro rata share in Units shall be calculated as of the end of the taxable year for which such allocation has been made; provided, however, that if a transferee of a Unit is admitted as a Partner during the course of the taxable year, the apportionment of allocations and distributions between the transferor and transferee of such Unit shall be made in the manner provided in Section 3.4(c).

(c) If, during any taxable year of the Partnership, there is a change in any Partner’s interest in the Partnership, each Partner’s allocation of any item of income, gain, loss, deduction, or credit of the Partnership for such taxable year shall be determined by taking into account the varying interests of the Partners pursuant to such method as is permitted by Code Section 706(d) and the regulations thereunder.

4. Distributions.

4.1 Time of Distribution. The Managing General Partner shall distribute the Partnership’s Distributable Cash at such time as it shall determine, but such distributions shall be made not less frequently than quarterly.

4.2 Distributions. Except as provided in Section 4.3, all distributions (other than those made in connection with the liquidation of the Partnership, which distributions shall be made in accordance with Section 9.3) shall be made 99% to the Partners (and proportionally among them based upon their ownership of Units) and 1% to the Managing General Partner. In no event shall funds be advanced or borrowed for purposes of distributions if the amount of such distributions would exceed the Partnership’s accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied.

11

4.3 Capital Account Deficits. No distributions shall be made to any Partner to the extent such distribution would create or increase a deficit in such Partner’s Capital Account (as adjusted in Section 3.2(b)). If a distribution is not made to a Partner by reason of the preceding sentence, then the amount which would have been distributed to such Partner shall be distributed to the other Partners in the proportion that the positive Capital Account balance of each Partner bears to the aggregate positive Capital Account balances of all of the Partners. Any such amount remaining after reduction of all Capital Accounts to zero shall be distributed to the Managing General Partner.

5. Activities.

5.1 Management. The Managing General Partner shall conduct, direct, and exercise full and exclusive control over all activities of the Partnership. Partners shall have no power over the conduct of the affairs of the Partnership or otherwise commit or bind the Partnership in any manner. The Managing General Partner shall manage the affairs of the Partnership in a prudent and businesslike fashion and shall use its best efforts to carry out the purposes and character of the business of the Partnership.

5.2 Conduct of Operations.

(a) The Partners agree to participate in the Partnership’s program of operations as established by the Managing General Partner; provided, however, that no well drilled to the point of setting casing need be completed if, in the Managing General Partner’s opinion, such well is unlikely to be productive of oil or gas in quantities sufficient to justify the expenditures required for well completion. The Partnership may participate with others in the drilling of wells and it may enter into partnerships or other such arrangements.

(b) The Partnership shall not participate in any joint operations on any co-owned Lease unless there has been acquired or reserved on behalf of the Partnership the right to take in kind or separately dispose of its proportionate share of the oil and gas produced from such Lease, exclusive of production which may be used in development and production operations on the Lease and production unavoidably lost, and, if the Managing General Partner is the operator of such Lease, the Managing General Partner shall enter into written agreements with every other person or entity owning any working or operating interest reserving to such person or entity a similar right to take in-kind so as not to result in the Partnership being treated as a member of an association taxable as a corporation for Federal income tax purposes.

(c) The relationship of the Partnership and the Managing General Partner (or an Affiliate retaining or acquiring an interest) as co-owners in Leases, except to the extent superseded by an operating agreement consistent with the provisions of Section 5.2(c), and except to the extent inconsistent with this Agreement, shall be governed by the AAPL Form 610 Model Operating Agreement-1989, with a provision reserving the right to take production in-kind, naming the Partnership as a non-operator, and with the accounting procedure to govern as the accounting procedures under such operating agreements.

(d) The Managing General Partner is not expected to act as the operator of the Partnership Well, and the Managing General Partner may designate such other persons as it deems appropriate to conduct the actual drilling and producing operations of the Partnership.

(e) The Partnership shall enter into a Turnkey Drilling Contract with the Managing General Partner or its Affiliates as described in the Placement Memorandum.

(f) The funds of the Partnership shall not be commingled with the funds of any other Person.

(g) The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner’s possession or control, and shall not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Partnership.

12

5.3 Acquisition and Sale of Leases.

(a) To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner or its Affiliate, the remainder of the interest in such Lease may be held by the Managing General Partner or such Affiliate, as applicable, which may retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner or its Affiliate to the exclusion of the Partnership. Any Leases acquired by the Partnership from the Managing General Partner or its Affiliate shall be acquired at the fair market value of such property.

(b) The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership’s best interest.

5.4 Title to Leases.

(a) Record title to each Lease acquired by the Partnership may be temporarily held in the name of the Managing General Partner, or in the name of any nominee designated by the Managing General Partner, as agent for the Partnership until a productive well is completed on a Lease. Thereafter, record title to Leases shall be assigned to and placed in the name of the Partnership.

(b) The Managing General Partner shall take the necessary steps in its best judgment to render title to the Leases to be assigned to the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on any Prospect acquired by the Partnership unless the Managing General Partner is satisfied that the undertaking of such operation would be in the best interest of Partners and the Partnership. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or Partners for any mistakes of judgment unless such mistakes were made in a manner not in accordance with general industry standards in the geographic area. Neither the Managing General Partner nor its Affiliates shall be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to any Lease assigned to the Partnership or the extent of the interest covered thereby.

5.5 Release, Abandonment, and Sale or Exchange of Properties. Except as provided elsewhere in Section 5 and in Section 6.3, the Managing General Partner shall have full power to dispose of the production and other assets of the Partnership, including the power to determine which Leases shall be released or permitted to terminate, those wells to be abandoned, whether any Lease or well shall be sold or exchanged, and the terms therefor.

5.6 Certain Transactions With Managing General Partner or Affiliates. Any services, equipment, or supplies which the Managing General Partner or an Affiliate furnishes to the Partnership which is not specifically referred to herein shall be furnished at a competitive rate which could be obtained in the geographical area of operations. Any such services for which the Managing General Partner or an Affiliate is to receive compensation shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid.

6. Managing General Partner.

6.1 Managing General Partner. The Managing General Partner shall have the sole and exclusive right and power to manage and control the affairs of and to operate the Partnership, to do all things necessary to carry on the business of the Partnership for the purposes described in Section 1.4 and to conduct the activities of the Partnership as set forth in Section 5. No financial institution or any other person, firm, or corporation dealing with the Managing General Partner shall be required to ascertain whether the Managing General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm, or corporation shall be protected in relying solely upon the deed, transfer, or assurance of, and the execution of such instrument or instruments by, the Managing General Partner. The Managing General Partner shall devote so much of its time to the business of the Partnership as in its judgment the conduct of the Partnership’s business shall reasonably require and shall not be obligated to do or perform any act or thing in connection with the business of the Partnership not expressly set forth herein. The Managing General Partner may engage in business ventures of any nature and description independently or with others and neither the Partnership nor any of the Partners shall have any rights in and to such independent ventures or the income or profits derived therefrom.

13

6.2 Authority of Managing General Partner. The Managing General Partner is specifically authorized and empowered, on behalf of the Partnership, and by consent of the Partners herein given, to do any act, execute any document or enter into any contract or any agreement of any nature necessary or desirable, in the opinion of the Managing General Partner, in pursuance of the purposes of the Partnership. Without limiting the generality of the foregoing, in addition to any and all other powers conferred upon the Managing General Partner pursuant to this Agreement and the Act, and except as otherwise prohibited by law or hereunder, the Managing General Partner shall have the power and authority to:

(a) Acquire Leases and other Oil and Gas Interests in furtherance of the Partnership’s business;

(b) Enter into and execute pooling agreements, farm out agreements, operating agreements, unitization agreements, dry and bottom hole and acreage contribution letters, construction contracts, and any and all documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, or operation of Oil and Gas Interests, and all other instruments deemed by the Managing General Partner to be necessary or appropriate to the proper operation of Oil or Gas Interests or to effectively and properly perform its duties or exercise its powers hereunder;

(c) Make expenditures and incur any obligations it deems necessary to implement the purposes of the Partnership, employ and retain such personnel as it deems desirable for the conduct of the Partnership’s activities, including employees, consultants, and attorneys and exercise on behalf of the Partnership, in such manner as the Managing General Partner, in its sole judgment, deems best, all rights, elections, and obligations granted to or imposed upon the Partnership;

(d) Manage, operate, and develop any Partnership property, and enter into operating agreements and other agreements with respect to properties acquired by the Partnership, including an operating agreement and turnkey drilling contract with the Managing General Partner as described in the Placement Memorandum, which agreements may contain such terms, provisions, and conditions as are usual and customary within the industry and as the Managing General Partner shall approve;

(e) Compromise, sue, or defend any and all claims in favor of or against the Partnership;

(f) Subject to the provisions of Section 8.4, make or revoke any election permitted the Partnership by any taxing authority;

(g) Perform any and all acts it deems necessary or appropriate for the protection and preservation of Partnership assets;

(h) Maintain, at the expense of the Partnership, such insurance coverage for public liability, fire and casualty, and any and all other insurance necessary or appropriate to the business of the Partnership in such amounts and of such types as it shall determine from time to time;

(i) Buy, sell, or lease property or assets on behalf of the Partnership;

(j) Enter into agreements to hire services of any kind or nature;

(k) Assign interests in properties to the Partnership;

14

(l) Enter into soliciting dealer agreements and perform all of the Partnership’s obligations thereunder, to issue and sell Units pursuant to the terms and conditions of this Agreement, the Subscription Agreements, and the Placement Memorandum, to accept and execute on behalf of the Partnership Subscription Agreements, and to admit Partners and Substitute Partners; and

(m) Perform any and all acts, and execute any and all documents, it deems necessary or appropriate to carry out the purposes of the Partnership.

6.3 Certain Restrictions on Managing General Partner’s Power and Authority. Notwithstanding any other provisions of this Agreement to the contrary, neither the Managing General Partner nor any of its Affiliates shall have the power or authority to, and shall not, do, perform, or authorize any of the following:

(a) Without having first received the prior consent of the holders of a majority of the then outstanding Units entitled to vote,

(1) sell all, or substantially all, of the assets of the Partnership (except upon liquidation of the Partnership pursuant to Section 9), unless cash funds of the Partnership are insufficient to pay the obligations and other liabilities of the Partnership;

(2) dispose of the goodwill of the Partnership; or

(3) do any other act which would make it impossible to carry on the ordinary business of the Partnership;

(b) Bind or obligate the Partnership with respect to any matter outside the scope of the Partnership business;

(c) Use the Partnership name, credit, or property for other than Partnership purposes;

(d) Utilize Partnership funds to invest in the securities of another Person except in the following instances:

(1) investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership’s business;

(2) temporary investments made in compliance with Section 2.2(c);

(3) investments which are a necessary and incidental part of a property acquisition transaction; and

(4) investments in entities established solely to limit the Partnership’s liabilities associated with the ownership or operation of property or equipment; provided, however, that in such instances duplicative fees and expenses shall be prohibited.

(e) Sell, transfer, or assign its interest (except for a collateral assignment which may be granted to a bank or other financial institution) in the Partnership, or any part thereof, or otherwise withdraw as Managing General Partner without written notice to the Partners.

15

6.4 Indemnification of Managing General Partner. The Managing General Partner shall have no liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that such course of conduct was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that such course of conduct did not constitute gross negligence or willful misconduct of the Managing General Partner. The Managing General Partner shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, and amounts paid in settlement of any claims sustained by it in connection with the Partnership, provided that the Managing General Partner has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that the same were not the result of gross negligence or willful misconduct on the part of the Managing General Partner. Indemnification of the Managing General Partner is recoverable only from the tangible net assets of the Partnership, including the insurance proceeds from the Partnership’s insurance policies and the insurance and indemnification of the Partnership’s subcontractors, and is not recoverable from the Partners.

6.5 Withdrawal.

(a) Notwithstanding the limitations contained in Section 6.3(e), the Managing General Partner shall have the right, by giving written notice to the Partners, to substitute in its stead as Managing General Partner any successor entity or any entity controlled by the Managing General Partner, and the Partners, by execution of this Agreement, hereby expressly consent to such a transfer unless it would adversely affect the status of the Partnership as a partnership for Federal income tax purposes.

(b) The Managing General Partner may voluntarily withdraw from the Partnership after written notice to the Partners.

(c) In the event a Managing General Partner withdraws and the Partners elect to continue the Partnership, the withdrawing Managing General Partner’s interest in the assets of the Partnership shall be determined by independent appraisal by a qualified independent petroleum engineering consultant who shall be selected by mutual agreement of the Managing General Partner and the successor Managing General Partner. Such appraisal will take into account an appropriate discount to reflect the risk of recovery of oil and gas reserves. The withdrawn Managing General Partner shall be paid for its interest within ten days of the determination of the value of such interest.

6.6 Tax Matters Partner. The Managing General Partner shall serve as the Tax Matters Partner for purposes of Code Sections 6221 through 6233. The Partnership may engage its accountants and/or attorneys to assist the Tax Matters Partner in discharging its duties hereunder.

6.7 Organization and Offering Fee. The Partnership shall pay the Managing General Partner an Organization and Offering Fee of $10,808.

7. Partners.

7.1 Management. No Partner shall take part in the control or management of the business or transact any business for the Partnership, and no Partner shall have the power to sign for or bind the Partnership, all of such authority having been given to the Managing General Partner in Section 6. Any action or conduct of Partners on behalf of the Partnership is hereby expressly prohibited. Any Partner who violates the provisions of this Section 7.1 shall be liable to the remaining Partners, the Managing General Partner, and the Partnership for any damages, costs, or expenses any of them may incur as a result of such violation. Partners shall have the right to vote only with respect to those matters specifically provided for in these Sections.

16

7.2 Assignment of Units.

(a) A Partner may transfer all or any portion of the Partner’s Units, subject to the following conditions:

(1) No such assignment shall be made if, in the opinion of counsel to the Partnership, such assignment would cause the termination of the Partnership for federal income tax purposes under Section 708 of the Code or might result in a change in the status of the Partnership to a “publicly traded partnership” within the meaning of Section 7704 of the Code, or if in the opinion of counsel to the Partnership such assignment may not be effected without registration under the Securities Act of 1933, as amended, or would result in the violation of any applicable state securities laws;

(2) Except in the case of a transfer of Units at death, as a result of adjudication of incompetency or insanity, or involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Partnership such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such transfer;

(3) The transferor and transferee shall furnish the Partnership with the transferee’s taxpayer identification number and sufficient information to determine the transferee’s initial tax basis in the Units transferred;

(4) The Partnership is reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such transfer; and

(5) If the transferor is an Additional General Partner, the Managing General Partner has consented to the transfer, which shall be in the sole discretion of the Managing General Partner.

(b) A Person who acquires one or more Units but who is not admitted as a Substitute Partner, shall only be entitled to allocations and distributions with respect to such Units in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of an Additional General Partner or a Limited Partner under the Act or this Agreement.

(c) Subject to the other provisions of Section 7, a transferee of Units may be admitted to the Partnership as a Substitute Partner only upon satisfaction of the following conditions:

(1) The Managing General Partner consents to such admission, which consent can be withheld in its absolute discretion;

(2) The Units with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer;

(3) The transferee becomes a party to this Agreement as a Partner and executes such documents and instruments as the Managing General Partner may reasonably request as may be necessary or appropriate to confirm such transferee as a Partner of the Partnership and such transferee’s agreement to be bound by the terms and conditions hereof; and

17

(4) If the transferee is not an individual of legal majority, the transferee provides the Partnership with evidence satisfactory to counsel for the Partnership of the authority of the transferee to become a Partner and to be bound by the terms and conditions of this Agreement.

(d) In any calendar quarter in which a transfer of a Unit occurs, the Partnership shall recognize the assignment not later than the last day of the calendar month following receipt of notice of assignment and required documentation.

(e) Each Partner hereby covenants and agrees with the Partnership, for the benefit of the Partnership and all Partners, that (i) the Partner is not currently making a market in Units and (ii) the Partner will not transfer any Unit on an established securities market or a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any regulations, proposed regulations, revenue rulings, or other official pronouncements of the Internal Revenue Service that may be promulgated or published thereunder). Each Partner further agrees that the Partner will not transfer any Unit to any Person unless such Person agrees to be bound by the provisions of this Section 7.2 and to transfer such Units only to Persons who agree to be similarly bound.

7.3 Prohibited Transfers.

(a) Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no effect whatever. If, however, the Partnership is required by a court of competent jurisdiction to recognize a transfer that is not a Permitted Transfer (or if the Managing General Partner, in its sole discretion, elects to recognize a transfer that is not a Permitted Transfer), the Partnership shall have the right (without limiting any other legal or equitable rights of the Partnership) to withhold distributions to which such transferee would otherwise be entitled and apply such distributions to satisfy the debts, obligations, or liabilities for damages that the transferor or transferee of such Units may have to the Partnership.

(b) In the case of a transfer or attempted transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such transfer shall be liable to indemnify and hold harmless the Partnership and the other Partners from all cost, liability, and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby.

7.4 Withdrawal by Partners. A Partner may not withdraw from the Partnership, except as otherwise provided in this Agreement.

7.5 Calling of Meetings. Partners owning 20% or more of the then outstanding Units entitled to vote shall have the right to request that the Managing General Partner call a meeting of the Partners. The Managing General Partner shall call such a meeting and shall deposit in the United States mails within 15 days after receipt of such request written notice to all Partners of the meeting and the purpose of the meeting, which shall be held on a date not less than 30, nor more than 60, days after the date of the mailing of such notice, at a reasonable time and place. Partners shall have the right to submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of Partners for consideration and approval by the Partners. Partners shall have the right to vote in person or by proxy.

7.6 Voting Rights. Partners shall be entitled to all voting rights granted to them under this Agreement and as specified by the Act. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Except as otherwise provided herein, at any meeting of Partners, a vote of a majority of Units represented at such meeting, in person or by proxy, with respect to matters considered at the meeting at which a quorum is present shall be required for approval of any such matters.

7.7 Voting by Proxy. The Partners may vote either in person or by proxy.

18

7.8 Conversion of Additional General Partner Units to Limited Partner Interests.

(a) Automatic Conversion. After the Partnership Well has been drilled and completed, the Managing General Partner shall file an amended certificate of limited partnership with the Secretary of State of the state of Kentucky for the purpose of converting the Additional General Partner Units to Limited Partners interests.

(b) Additional General Partners Shall Have Contingent Liability. Upon conversion the Additional General Partners shall be Limited Partners entitled to limited liability; however, they shall remain liable to the Partnership for any additional Capital Contribution required for their proportionate share of any Partnership obligation or liability arising before the conversion of their Units as provided in Section 3.05(b)(2).

(c) Conversion Shall Not Affect Allocations. The conversion shall not affect the allocation to any Participant of any item of Partnership income, gain, loss, deduction or credit or other item of special tax significance other than Partnership liabilities, if any. Further, the conversion shall not affect any Participant’s interest in the Partnership’s oil and gas properties and unrealized receivables.

(d) Right to Convert if Reduction of Insurance. Notwithstanding the foregoing, the Managing General Partner shall notify all Participants at least 30 days before the effective date of any adverse material change in the Partnership’s insurance coverage. If the insurance coverage is to be materially reduced, then the Additional General Partners shall have the right to convert their Units into Limited Partner interests before the reduction by giving written notice to the Managing General Partner.

7.9 Liability of Partners. Except as otherwise provided in this Agreement or the Act, each Additional General Partner shall be jointly and severally liable for the debts and obligations of the Partnership. In addition, each Additional General Partner shall be jointly and severally liable for any wrongful acts or omissions of the Managing General Partner and/or the misapplication of money or property of a third party by the Managing General Partner acting within the scope of its apparent authority to the extent such acts or omissions are chargeable to the Partnership.

8. Books and Records.

8.1 Books and Records.

(a) For accounting and income tax purposes, the Partnership shall operate on a calendar year.

(b) The Managing General Partner shall keep just and true records and books of account with respect to the operations of the Partnership and shall maintain and preserve during the term of the Partnership and for four years thereafter all such records, books of account, and other relevant Partnership documents. The Managing General Partner shall maintain for at least six years all records necessary to substantiate the fact that Units were sold only to purchasers for whom such Units were suitable. Such books shall be maintained at the principal place of business of the Partnership and shall be kept on the accrual method of accounting.

(c) The Managing General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership’s business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including the names and addresses of Partners, books of account, and records of Partnership proceedings, may be kept on any electronic information storage device; provided, however, that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books and records of the Partnership shall be made available for review by any Partner or the Partner’s representative at any reasonable time.

(d) The Participant List shall be maintained as a part of the books and records of the Partnership and shall be available for the inspection by any Partner or such Partner’s designated agent at the principal office of the Partnership upon the request of any Partner and shall be updated at least quarterly to reflect changes in the information contained therein.

19

8.2 Reports. The Managing General Partner shall deliver to each Partner the following financial statements and reports at the times indicated below:

(a) By March 15 of each year, a report containing such information as to enable each Partner to prepare and file such Partner’s Federal income tax return.

(b) Such other reports and financial statements as the Managing General Partner shall determine from time to time.

8.3 Bank Accounts. All funds of the Partnership shall be deposited in such separate bank account or accounts, short term obligations of the U.S. Government or its agencies, or other interest-bearing investments and money market or liquid asset mutual funds as shall be determined by the Managing General Partner. All withdrawals therefrom shall be made upon checks signed by the Managing General Partner or any person authorized to do so by the Managing General Partner.

8.4 Federal Income Tax Elections.

(a) Except as otherwise provided in this Section 8.4, all elections required or permitted to be made by the Partnership under the Code shall be made by the Managing General Partner in its sole discretion. Each Partner agrees to provide the Partnership with all information necessary to give effect to any election to be made by the Partnership.

(b) The Partnership shall elect to currently deduct intangible drilling and development costs as an expense for income tax purposes and shall require any partnership, joint venture, or other arrangement in which it is a party to make such an election.

9. Dissolution; Winding-Up.

9.1 Dissolution.

(a) Except as otherwise provided herein, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, or bankruptcy of any Partner shall not dissolve the Partnership. The successor to the rights of such Partner shall have all the rights of an Partner for the purpose of settling or administering the estate or affairs of such Partner; provided, however, that no successor shall become a Substitute Partner except in accordance with Section 7; and provided further that upon the occurrence of any of the events referred to in the first sentence of this Section 9.1(a) with respect to an Additional General Partner, the Partnership shall be dissolved and wound up unless at that time there is at least one other Additional General Partner, in which event the business of the Partnership shall continue to be carried on. Neither the expulsion of any Partner, nor the admission or substitution of an Partner, shall work a dissolution of the Partnership. The estate of a deceased, insane, incompetent, or bankrupt Partner shall be liable for all his liabilities as a Partner.

(b) Notwithstanding anything in the Act to the contrary, the Partnership shall be dissolved upon, but not before, the earliest to occur of (i) the written consent of the Managing General Partner and Partners owning a majority of the then outstanding Units to dissolve and wind up the affairs of the Partnership; (ii) subject to the provisions of Section 9.1(c), the retirement, withdrawal, removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in the case of a corporate Managing General Partner, the withdrawal, removal, filing of a certificate of dissolution, liquidation, or bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or abandonment of all, or substantially all, of the Partnership’s property and the sale and/or collection of any evidences of indebtedness received in connection therewith; (iv) December 31, 2042 or (v) a dissolution event described in Section 9.1(a).

20

(c) In the case of any event described in Section 9.1(b)(ii), if a successor Managing General Partner is selected by Partners owning a majority of the then outstanding Units within 90 days after such event, and if such Partners agree within such 90 day period to continue the business of the Partnership, then the Partnership shall not be dissolved.

(d) If, notwithstanding the provisions of this Agreement, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a Partner’s interest in the Partnership, or the substitution or admission of a new Partner, shall be deemed under the Act to cause a dissolution of the Partnership, then, except as provided in Section 9.1(c), the remaining Partners may, in accordance with the Act, continue the Partnership business as a new partnership and all such remaining Partners agree to be bound by the provisions of this Agreement.

9.2 Liquidation. Upon a dissolution of the Partnership, the Managing General Partner, or in the event there is no Managing General Partner, any other Person selected by the Partners to act as the liquidator, shall cause the affairs of the Partnership to be wound up and shall take account of the Partnership’s assets (including Capital Contributions, if any, of the Managing General Partner pursuant to Section 3.1(e)) and, subject to the provisions of Section 9.3(b) shall be liquidated as promptly as is consistent with obtaining the fair market value thereof (which dissolution and liquidation may be accomplished over a period spanning one or more tax years in the sole discretion of the Managing General Partner or the liquidator), and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in accordance with Section 9.3.

9.3 Winding-Up.

(a) Upon the dissolution of the Partnership and winding up of its affairs, the assets of the Partnership shall be distributed as follows:

(1) all of the Partnership’s debts and liabilities to Persons other than to Partners shall be paid and discharged;

(2) to the establishment of any cash reserves which the Managing General Partner or liquidator determines to create in their sole discretion for unmatured and/or contingent liabilities or obligations of the Partnership; and

(3) to the Partners, in accordance with their respective Capital Accounts; provided, however, that if the Managing General Partner or liquidator establishes any reserves in accordance with the provisions of Section 9.3(a)(2), then the distributions pursuant to this Section 9.3(a)(3) (including distribution of any released reserves) shall be pro rata in accordance with the balances of the Partners’ Capital Accounts.

(b) Distributions pursuant to Section 9.3 shall be made in cash or in kind to the Partners, at the election of the Managing General Partner. Notwithstanding the provision of this Section 9.3(b), in no event shall the Partners reserve the right to take in kind and separately dispose of their share of production.

(c) Any in kind property distributions to the Partners shall be made to a liquidating trust or similar entity for the benefit of the Partners, unless at the time of the distribution:

(1) the Managing General Partner shall offer the individual Partners the election of receiving in kind property distributions and the Partners accept such offer after being advised of the risks associated with such direct ownership; or

21

(2) there are alternative arrangements in place which assure the Partners that they will not, at any time, be responsible for the operation or disposition of Partnership properties.

10. Power of Attorney.

10.1 Managing General Partner as Attorney-in-Fact. Each Partner makes, constitutes, and appoints the Managing General Partner their true and lawful attorney-in-fact, with full power of substitution, in the name, place, and stead of the Partner, from time to time to make, execute, sign, acknowledge, and file:

(a) Any notices or certificates as may be required under the Act and under the laws of any other state or jurisdiction in which the Partnership shall engage, or seek to engage, to do business and to do such other acts as are required to constitute the Partnership as a limited partnership under such laws.

(b) Any amendment to the Agreement pursuant to and which complies with Section 11.9.

(c) Such certificates, instruments, and documents as may be required by, or may be appropriate under the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business.

(d) Such certificates, instruments, and documents as may be required by, or as may be appropriate for the Partner to comply with, the laws of any state or other jurisdiction to reflect a change of name or address of the Partner.

(e) Such certificates, instruments, and documents as may be required to be filed with the Department of Interior (including any bureau, office or other unit thereof, whether in Washington, D.C. or in the field, or any officer or employee thereof), as well as with any other federal or state agencies, departments, bureaus, offices, or authorities and pertaining to (i) any and all offers to lease, Leases (including amendments, modifications, supplements, renewals, and exchanges thereof) of, or with respect to, any lands under the jurisdiction of the United States or any state including, without limitation, lands within the public domain, and acquired lands, and provides for the leasing thereof, (ii) all statements of interest and holdings on behalf of the Partnership or the Partner; (iii) any other statements, notices, or communications required or permitted to be filed or which may hereafter be required or permitted to be filed under any law, rule, or regulation of the United States, or any state relating to the leasing of lands for oil or gas exploration or development, (iv) any request for approval of assignments or transfers of oil and gas Leases, any unitization or pooling agreements and any other documents relating to lands under the jurisdiction of the United States or any state; and (v) any other documents or instruments which said attorney-in-fact, in its sole discretion, shall determine should be filed.

(f) Any further document, including furnishing verified copies of this Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider necessary or convenient in connection with any of the foregoing, hereby giving said attorney-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the foregoing as fully as the undersigned might and could do if personally present, and hereby ratifying and confirming all that said attorney-in-fact shall lawfully do to cause to be done by virtue hereof.

10.2 Nature as Special Power. The foregoing grant of authority:

(a) is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incompetency of the Partner granting it;

(b) shall survive the delivery of any assignment by the Partner of the whole or any portion of the Partner’s Units; except that where the assignee thereof has been approved by the Managing General Partner for admission to the Partnership as a Substitute Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file any instrument necessary to effect such substitution; and

22

(c) may be exercised by said attorney-in-fact by a listing of all of the Partners executing any instrument with a single signature of said attorney-in-fact.

11. Miscellaneous Provisions.

11.1 Liability of Parties. By entering into this Agreement, no party shall become liable for any other party’s obligations relating to any activities beyond the scope of this Agreement, except as provided by the Act. If any party suffers, or is held liable for, any loss or liability of the Partnership which is in excess of that agreed upon herein, such party shall be indemnified by the other parties, to the extent of their respective interests in the Partnership, as provided herein.

11.2 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed or sent by registered or certified mail, postage and charges prepaid, addressed as follows (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section):

(a) If to the Managing General Partner, 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

(b) If to a Partner, at such Partner’s address for purposes of notice which is set forth on Exhibit A attached hereto. Unless otherwise expressly set forth in this Agreement to the contrary, any such notice shall be deemed to be given on the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid.

11.3 Paragraph Headings, Section References. The headings in the Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. All references herein to Sections shall refer to Sections of this Agreement unless the context clearly requires otherwise.

11.4 Severability. Every portion of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement.

11.5 Sole Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly approved and executed by the Managing General Partner and such percentage of Partners as provided in Section 11.9.

11.6 Applicable Law. This Agreement, shall be governed by, and construed in accordance with, the laws of the State of Kentucky without regard to its conflict of law rules.

11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had all signed the same document. All counterparts shall be construed together and shall constitute one agreement.

11.8 Waiver of Action for Partition. Each Partner irrevocably waives, during the term of the Partnership, any right that such Partner may have to maintain any action for partition with respect to the Partnership and the property of the Partnership.

23

11.9 Amendments.

(a) Unless otherwise specifically herein provided, this Agreement shall not be amended without the consent of Partners owning a majority of the then outstanding Units entitled to vote.

(b) The Managing General Partner may, without notice to, or consent of, any Partner, amend any provisions of this Agreement, or consent to and execute any amendment to this Agreement, to reflect:

(1) A change in the name or location of the principal place of business of the Partnership;

(2) The admission of Substitute Partners or additional Partners in accordance with this Agreement;

(3) A reduction in, return of, or withdrawal of, all or a portion of any Partner’s Capital Contribution;

(4) A correction of any typographical error or omission;

(5) A change which is necessary in order to qualify the Partnership as a limited partnership under the laws of any other state or which is necessary or advisable, in the opinion of the Managing General Partner, to ensure that the Partnership will be treated as a partnership and not as an association taxable as a corporation for Federal income tax purposes;

(6) A change in the allocation provisions, in accordance with the provisions of Section 3.2(a), in a manner that, in the sole opinion of the Managing General Partner (which opinion shall be determinative), would result in the most favorable aggregate consequences to the Partners as nearly as possible consistent with the allocations contained herein, for such allocations to be recognized for Federal income tax purposes due to developments in the Federal income tax laws or otherwise; or

(7) Any other amendment similar to the foregoing; provided however, that the Managing General Partner shall have no authority, right, or power under this Section 11.9(b) to amend the voting rights of the Partners.

11.10 Substitution of Signature Pages. This Agreement has been executed in duplicate by the Partners and one executed copy of the signature page is attached to the Partner’s copy of this Agreement. It is agreed that the other executed copy of such signature page may be attached to an identical copy of this Agreement together with the signature pages from counterpart Agreements which may be executed by other Partners.

11.11 Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference.

24

2012 Bayou City Year End Program, L.P.

PARTNERSHIP AGREEMENT SIGNATURE PAGE

Number of Units of Limited Partnership interest

Number of Units of General Partnership interest

Cash Payment - $107,000 per Unit to be paid as follows:

$90,000 payable upon subscription for the drilling and testing of the Partnership Well and for investment in the Opportunity Fund.  (Payable to “AB & T, Escrow Agent for the 2012 Bayou City Year End Program, L.P.”)

$17,000 payable when the Managing General Partner decides to complete the Galveston Bay Prospect Well (Payable to “2012 Bayou City Year End Program, L.P.”)

REGISTRATION INFORMATION

Print Name	Print Name of Joint Owner (if applicable)
Social Security Number or Tax ID Number	Social Security Number or Tax ID Number
Drivers License Number	Drivers License Number
X	X
Signature	Signature of Joint Owner
Mailing Address:	SELLING BROKER/DEALER’S ACCEPTANCE
	Broker/Dealer:
	Date:
Home Ph #:	DEALER MANAGER’S ACCEPTANCE
Work Ph #:	Source Capital Group, Inc., as Dealer Manager, herewith accepts the foregoing subscription.
Email:
	Source Capital Group, Inc.
	Date:

Check One:			PARTNERSHIP’S ACCEPTANCE
	Individual	IRA
	J/T/W/R/O/S	Keogh	Bayou City Exploration, Inc., as Managing General
	Partnership	TIC	Partner, herewith accepts the foregoing
	Trust Created on _____	Corporation	subscription in the 2012 Bayou City Year End Program, L.P.
	Limited Liability	Community Property
	Company
			Stephen C. Larkin, Chief Financial Officer
			Date:

25

EXHIBIT A

TO

AGREEMENT OF LIMITED PARTNERSHIP

OF

2012 Bayou City Year End Program, L.P.

Names and Addresses of Investors Nature of Interest Number of Units

26

EX-10.6

Exhibit 10.6

TURNKEY DRILLING CONTRACT

THIS AGREEMENT is made and entered into as of the 22^nd day of October, 2012 by and between the parties herein designated as "Partnership" and "Contractor."

Partnership:	2012 Bayou City Year End Program, L.P.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101
Contractor:	Bayou City Exploration, Inc.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained, Partnership engages Contractor as an Independent Contractor to furnish the equipment, labor and services to drill, test, and complete its working interest portion, as per Exhibit “1”, of the well to be drilled on the Partnership Prospect in Galveston County, Texas in search of oil and/or gas.

As a Management Fee for the supervision and management of the affairs of the Partnership during the work over, drilling and testing periods of Initial Operations, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Drilling Price over the actual cost of such operations. Likewise, during the completion period of Initial Operations, if completion is attempted on the Prospect Well, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Completion Price over the actual costs of such operations. The Managing General Partner intends to enter into one or more Operating Agreements (the “Operating Agreements”) with third party operators which will perform certain services with respect to the work over, drilling, testing and, if applicable, completion of the Prospect Well. We cannot accurately predict the actual amount constituting compensation to be paid to any third party operator for its services under the Operating Agreements and therefore, it also cannot accurately predict the excess amount, if any, of the Turnkey Drilling Price over the actual cost of such operations that the Managing General Partner will receive. Costs to be expended under the Operating Agreements are a direct result of the work over, drilling, testing and completion risks encountered. During work over, drilling, testing and completion operations, a variety of conditions may be encountered, such as loss of circulation, blowouts, detachment and/or loss of drilling equipment, necessity for the purchase and installation of down-hole equipment to keep the wellbore intact, and repair of inadequate cement to hold production casing in place. As such costs are unpredictable with any degree of certainty, in the event of totally uneventful operations, compensation payable pursuant to the Operating Agreements could equal or exceed the actual work over, drilling, testing and completion costs. Likewise, in the event that a series of major difficulties are encountered, these costs could equal or exceed the amount of Initial Capital, and Bayou City Exploration, Inc. would be responsible for such excess costs. Bayou City Exploration, Inc. may use any funds it receives from management fees and/or profits, if any, for any purpose, including payment of General and Administrative Expenses of Bayou City Exploration, Inc. such as employee salaries and office expenses.

1. LOCATION OF PARTNERSHIP WELL(S):

See Exhibit "1" attached hereto and made a part hereof.

1

2. TERMINATION DATE:

Contractor agrees to use its best efforts to complete operations for the acquisition, drilling and testing of the Partnership Well by June 30, 2013, and Contractor and the Partnership agree that time is of the essence under this Agreement.

3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:

Contractor shall be paid at the following rate for the work performed hereunder:

Turnkey Drilling Price ($459,091) and Completion Price in the event that completion is attempted ($146,217) = Total $605,308.

4. DEPTH:

Subject to the right of the Partnership to direct the stoppage of work at any time (as provided in paragraph 7), the Partnership Well shall be drilled to the depth as specified in Exhibit “1” or to the depth at which the production casing (production string) is set, whichever depth is first reached, which depth is hereinafter referred to as the “Contract Depth.”

5. TIME OF PAYMENT:

5.1 Basis: Payment by the Partnership to the Contractor of the Drilling Price becomes due and payable upon the receipt by the Partnership of an invoice from the Contractor. Neither commencement nor completion of Contractor’s performance shall be a condition precedent to this obligation to pay.

5.2 Attorneys’ Fees: If this Agreement is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or probate proceedings, then the Partnership agrees that there shall be added to the amount due reasonable attorneys' fees and costs.

6. COMPLETION PROGRAM:

The Contractor, in its capacity as Managing General Partner of the Partnership (the “Managing General Partner”), along with other participating Partnership Well working interest owners, shall determine whether Contractor shall set a production string on the Prospect Well.  In the event the Managing General Partner directs that drilling operations cease and to abandon the Partnership Well, Contractor shall plug the Partnership Well, remove all drilling apparatus from the well site and the obligations of the parties hereunder shall cease.  In the event the Managing General Partner directs Contractor to set a production string on the Prospect Well and makes timely payment to the Contractor of the Completion Price, Contractor shall commence the operations necessary to attempt to complete the Prospect Well for commercial production, including the setting of a production string and the acquisition, delivery and installation of a pump jack, holding tank and all other necessary equipment needed to extract and contain oil and/or gas from the Partnership Well.

7. STOPPAGE OF WORK BY THE PARTNERSHIP:

Notwithstanding the provisions of paragraph 3 with respect to the depth to be drilled, the Managing General Partner shall have the right to direct the stoppage of the work to be performed by the Contractor hereunder at any time prior to reaching the Contract Depth and even though Contractor has made no default hereunder.  If the Partnership exercises its right to discontinue drilling the well(s), the Partnership will not receive a refund for any unused portion of the Drilling Price allocable to the discontinued well(s).

2

8. REPORTS TO BE FURNISHED BY CONTRACTOR:

8.1 Contractor shall keep and furnish to the Partnership an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report form or other form acceptable to the Partnership.  A legible copy of said form signed by Contractor’s representative shall be furnished by Contractor to the Partnership.

8.2 Delivery tickets, if requested by the Partnership, covering any material or supplies furnished by the Partnership shall be turned in each day with the daily drilling report.  The quantity, description and condition of materials and supplies so furnished shall be checked by Contractor and such tickets shall be properly certified by Contractor.

9. RESPONSIBILITY FOR A SOUND LOCATION:

Contractor shall prepare a sound location, adequate in size and capable of properly supporting the drilling rig.  Contractor shall be responsible for a conductor pipe program adequate to prevent soil and subsoil washout.  In the event subsurface conditions cause a cratering or shifting of the location surface, and loss or damage to the rig or its associated equipment results therefrom, the Partnership shall not be responsible for reimbursing Contractor for any such loss or damage including payment of work stoppage rate during repair and/or demobilization if applicable.

10. RESPONSIBILITY FOR ROAD AND LOCATIONS:

Contractor agrees at all times to maintain roads to locations and each location in such a condition that will allow free access and movement to and from the drilling site in an ordinarily equipped highway type vehicle.

11. PAYMENT OF CLAIMS:

Contractor agrees to pay all claims for labor, material, services and supplies to be furnished by Contractor hereunder, and agrees to allow no lien or charge to be fixed upon the lease, the Partnership Well or other property of the Partnership or the land upon which said Partnership Well is located.

12. RESPONSIBILITY FOR LOSS OR DAMAGE:

12.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times for damage to or destruction of Contractor’s surface equipment, including but not limited to all drilling tools, machinery and appliances, for use above the surface, regardless of when or how such damage or destruction occurs.

12.2 Contractor’s In-Hole Equipment Basis: Contractor shall assume liability at all times for damage to or destruction of Contractor’s in-hole equipment, including but not limited to drill pipe, drill collars and tool joints, and the Partnership shall be under no liability to reimburse Contractor for any such loss.

3

12.3 Partnership’s Equipment: The Partnership shall assume liability at all times for any defective equipment owned by it, including but not limited to casing, tubing, well head equipment, and Contractor shall be under no liability to reimburse the Partnership for any such loss or damage.

12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole for any cause attributable to Contractor's operators be lost or damaged while Contractor is engaged in the performance of work hereunder, all such loss of or damage to the hole including cost of regaining control of a fire or blowout, shall be borne by Contractor; and if the hole is not in condition to be carried to the Contract Depth as herein provided, Contractor shall, if requested by the Partnership, commence a new hole without delay at Contractor's cost; and the drilling of the new hole shall be conducted under the terms and conditions of this Agreement in the same manner as though it were the first hole and Contractor shall be responsible for replacement of any casing lost in a junked and abandoned hole as well as the cost of preparing a new drill site for the new hole and the road thereto.  In such case, Contractor shall not be entitled to any payment or compensation for expenditures made or incurred by Contractor on or in connection with the abandoned hole.

13. NO WAIVER EXCEPT IN WRITING:

It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the party.

14. FORCE MAJEURE:

If either party hereto is rendered unable, wholly or in part (and its performance hereunder is not rendered merely commercially impracticable) by force majeure to carry out its obligation under this Agreement, it shall give the other party prompt written notice of the force majeure with reasonably full particulars.  Thereupon, the obligations of the notifying party, so far as they are affected by the force majeure, shall be suspended during, but not longer than, the continuance of the force majeure, and the notifying party agrees to use reasonable diligence to remove the force majeure as quickly as possible.  This paragraph shall not relieve either party hereto for its obligations to expend sums of money or to indemnify the other party hereto, as provided elsewhere in this Agreement. The term "force majeure" as herein employed shall mean an act of God, strike, lockout or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, extreme weather conditions, or governmental restraint.

15. INFORMATION CONFIDENTIAL:

Upon written request by the Partnership, information obtained by Contractor in the conduct of drilling operation on the Partnership Well, including, but not limited to depth, formations penetrated, the results of coring, testing and surveying, shall be considered confidential and shall not be divulged by Contractor or its employees, to any person, firm or any corporation other than the Partnership’s designated representative.

16. NOTICES AND PLACE OF PAYMENT:

All notices to be given with respect to this Agreement unless otherwise provided for shall be given to Contractor and to the Partnership respectively at the addresses hereinabove shown.  All sums payable hereunder to Contractor shall be payable at the address hereinabove shown unless otherwise specified herein.

4

BAYOU CITY EXPLORATION, INC.
By:	/s/ Stephen C. Larkin
	Stephen C. Larkin, President, CEO & CFO

2012 Bayou City Year End Program, L.P., A KENTUCKY LIMITED PARTNERSHIP
By:	/s/ Stephen C. Larkin
	Stephen C. Larkin, President, CEO & CFO

5

EXHIBIT "1" TO EXHIBIT "C"

October 22, 2012

The primary investment objective of the Partnership is, assuming all Units are sold, the acquisition of up to 2.5% Working Interest, which is approximately 2.0% of the Net Revenue Interest in one well to be drilled on the Galveston Bay Prospect (the “Galveston Bay Prospect Well”). The Galveston Bay Prospect will consist of oil and gas leases in Galveston County, Texas and will be drilled to a depth sufficient to test the Frio Ban Field #2 formation. In addition to the drilling program described above, the 2012 Bayou City Year End Program, L.P. includes a $300,000 investment in the Opportunity Fund VII, LLC. The “Opportunity Fund” will remain open through December 31, 2012 and will be offered through participation in each drilling program. As each drilling program is sold out and completed, our partners benefit from the growth of the Fund in asset numbers and total value. The net effect is that partners will progress from owning a large percentage of a small number of assets to owning a small percentage of a large number of assets. Each addition to the Fund spreads the risk over a larger asset base throughout the Fund subscription period. The primary objective of the Opportunity Fund is to mitigate the risk associated with oil and gas investment. The Fund is a joint venture with Home Servicing, LLC of Baton Rouge, Louisiana and seeks to provide our partners with aggressive returns via investment in mortgage notes and land contracts purchased at significant discounts to existing balances. Greater details regarding this concept and the parties involved can be found herein.

6

EX-10.7

Exhibit 10.7

LIMITED PARTNERSHIP

AGREEMENT

OF

2013 Bayou City Seabreeze Offset Drilling Program, L.P.

TABLE OF CONTENTS

Section	Page
1.  The Partnership	1
1.1  Definitions	1
1.2  Organization	4
1.3  Partnership Name	4
1.4  Character of Business	4
1.5  Principal Place of Business	4
1.6  Term of Partnership	4
1.7  Filings	6
1.8  Independent Activities	6
2.  Capitalization	6
2.1  Capital Contributions of the Managing General Partner and Initial Limited Partner	6
2.2  Capital Contributions of the Partners	7
2.3  Additional Capital Contributions	7
2.4  No Interest on Capital Contributions, No Withdrawals	7
3.  Capital Accounts and Allocations	7
3.1  Capital Accounts	7
3.2  Allocation of Profits and Losses and Costs and Expenses	9
3.3  Depletion	10
3.4  Apportionment Among Partners	11
4.  Distributions	11
4.1  Time of Distribution	11
4.2  Distributions	11
4.3  Capital Account Deficits	11
5.  Activities	11
5.1  Management	11
5.2  Conduct of Operations	12
5.3  Acquisition and Sale of Leases	12
5.4  Title to Leases	13
5.5  Release, Abandonment, and Sale or Exchange of Properties	13
5.6  Certain Transactions With Managing General Partner or Affiliates	13
6.  Managing General Partner	13
6.1  Managing General Partner	13
6.2  Authority of Managing General Partner	13
6.3  Certain Restrictions on Managing General Partner's Power and Authority	14
6.4  Indemnification of Managing General Partner	15
6.5  Withdrawal	16
6.6  Tax Matters Partner	16

ii

TABLE OF CONTENTS

Section	Page
7.  Partners	16
7.1  Management	16
7.2  Assignment of Units	16
7.3  Prohibited Transfers	17
7.4  Withdrawal by Partners	18
7.5  Calling of Meetings	18
7.6  Voting Rights	18
7.7  Voting by Proxy	18
7.8  Conversion of Additional General Partner Units to Limited Partner Interests	18
7.9  Liability of Partners	18
8.  Books and Records	19
8.1  Books and Records	19
8.2  Reports	19
8.3  Bank Accounts	19
8.4  Federal Income Tax Elections	19
9.  Dissolution; Winding-Up	20
9.1  Dissolution	20
9.2  Liquidation	20
9.3  Winding-Up	20
10.  Power of Attorney	21
10.1  Managing General Partner as Attorney-in-Fact	21
10.2  Nature as Special Power	22
11.  Miscellaneous Provisions	22
11.1  Liability of Parties	22
11.2  Notices	22
11.3  Paragraph Headings, Section References	22
11.4  Severability	23
11.5  Sole Agreement	23
11.6  Applicable Law	23
11.7  Execution in Counterparts	23
11.8  Waiver of Action for Partition	23
11.9  Amendments	23
11.10  Substitution of Signature Pages	24
11.11  Incorporation by Reference	24

iii

LIMITED PARTNERSHIP AGREEMENT

OF

2013 Bayou City Seabreeze Offset Drilling Program, L.P.

This Limited Partnership Agreement (this “Agreement”) is entered into and effective as of the 8^th day of March 2013, by and between (i) Bayou City Exploration, Inc., a Nevada corporation, as the Managing General Partner and (ii) the Persons whose names are set forth on Exhibit A attached hereto, as Additional General Partners or as Limited Partners.

Recitals:

A. The Managing General Partner and the Initial Limited Partner formed a Kentucky limited partnership named 2013 Bayou City Seabreeze Offset Drilling Program, L.P. (“Partnership”) pursuant to the provisions of the Kentucky Revised Uniform Limited Partnership Act.

B. On the date hereof, the Additional General Partners and Limited Partners have been admitted to the Partnership.

C. The parties desire to enter into this Agreement to set forth their mutual understandings.

Agreement:

Now, Therefore, the parties hereby agree as follows:

1. The Partnership.

1.1 Definitions. Capitalized words and phrases used in this Agreement shall have the following meanings:

(a) “Act” shall mean the Kentucky Revised Uniform Limited Partnership Act, as amended from time to time (or any corresponding provisions of succeeding law).

(b) “Additional General Partner” shall mean a Partner who purchases Units as an additional general partner, and such Additional General Partner’s transferees and assigns who are admitted as a Substitute Partner. The term “Additional General Partners” shall not include such Partner who converts such Partner’s interest in the Partnership into a Limited Partner interest pursuant to Section 7.8.

(c) “Affiliate” of a specified Person shall mean (a) any Person directly or indirectly owing, controlling, or holding with power to vote 10% or more of the outstanding voting securities of such specified Person; (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified Person; (c) any Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; (d) any officer, director, trustee or partner of such specified Person, and (e) if such specified Person is an officer, director, trustee or partner, any Person for which such Person acts in any such capacity.

(d) “Agreement” shall mean this Limited Partnership Agreement, as amended from time to time.

(e) “Capital Account” shall mean, with respect to any Partner, the capital account maintained for such Partner pursuant to Section 3.1.

(f) “Capital Contribution” shall mean the total contributions made by a Partner to the capital of the Partnership pursuant to Section 2.

1

(g) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law).

(h) “Depreciation” shall mean, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for Federal income tax purposes, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the Federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the Federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managing General Partner.

(i) “Distributable Cash” shall mean for any period the excess, if any, of (A) the sum of (i) all gross receipts from any sources (including loan proceeds) for such period, other than from Capital Contributions, plus (ii) any funds released by the Managing General Partner from previously established reserves (referred to in (B)(ii) below), over (B) the sum of (i) all cash expenditures of the Partnership for such period not funded by Capital Contributions or paid out of previously established reserves (referred to in (B)(ii) below), plus (ii) a reasonable reserve for future expenditures as determined by the Managing General Partner.

(j) “General Partners” shall mean the Additional General Partners and the Managing General Partner.

(k) “Gross Asset Value” shall mean, with respect to any asset, the asset’s adjusted basis for Federal income tax purposes, except as follows:

(1) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the contributing Partner and the Partnership;

(2) The Gross Asset Value of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Managing General Partner, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership of property in consideration for an interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only if the Managing General Partner reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership;

(3) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and

(4) The Gross Asset Value of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section 3.2(g); provided, however, that Gross Asset Value shall not be adjusted pursuant to this Section 1.1(k)(4) to the extent the Managing General Partner determines that an adjustment pursuant to Section 1.1(k)(2) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.1(k)(4).

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Sections 1.1(k)(1), 1.1(k)(2), or 1.1(k)(4), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

(l) “Initial Limited Partner” shall mean Stephen C. Larkin or any successor to the Initial Limited Partner’s interest in the Partnership.

2

(m) “Lease” shall mean full or partial interests in: (i) undeveloped oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner thereof to drill for, reduce to possession, and produce oil and gas.

(n) “Limited Partner” shall mean a Partner who purchases Units as a Limited Partner, such Limited Partner’s transferee or assignee who is admitted as a Substitute Partner, and an Additional General Partner who converts their interest to a Limited Partner interest pursuant to the provisions of this Agreement.

(o) [Intentionally omitted]

(p) “Managing General Partner” shall mean Bayou City Exploration, Inc. or its successor, in its capacity as the Managing General Partner.

(q) “Nonrecourse Liability” shall have the meaning set forth in Treas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).

(r) “Oil and Gas Interest” shall mean any oil or gas royalty or lease, or fractional interest therein, or certificate of interest or participation or investment contract relative to such royalties, leases, or fractional interests, or any other interest or right which permits the exploration of, drilling for, or production of oil and gas or other related hydrocarbons or the receipt of such production or the proceeds thereof.

(s) “Operating Costs” shall mean expenditures made and costs incurred in producing and marketing oil or gas from the completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges, and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations.

(t) “Organization and Offering Fee” shall mean the fee to which the Managing General Partner is entitled pursuant to Section 6.7.

(u) “Participant List” shall mean an alphabetical list of the names, addresses and business telephone numbers of the Partners, along with the number of Units held by each of them.

(v) “Partner Minimum Gain” shall mean partner nonrecourse debt minimum gain within the meaning of Treas. Reg. Section 1.704-2(i)(3).

(w) “Partner Nonrecourse Debt” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(4).

(x) “Partner Nonrecourse Deductions” shall have the meaning set forth in Treas. Reg. Section 1.704-2(i)(2).

(y) “Partners” shall mean the Managing General Partner, the Initial Limited Partner, and the Partners.

(z) “Partner” shall mean any Person other than the Managing General Partner and Initial Limited Partner (i) whose name is set forth on Exhibit A attached hereto as an Additional General Partner or as a Limited Partner, or who has been admitted as an additional or Substitute Partner pursuant to the terms of this Agreement, and (ii) who is the owner of one or more Units.

(aa) “Partnership” shall mean the 2013 Bayou City Seabreeze Offset Drilling Program, L.P. formed by the Partners pursuant to the Act and governed by this Agreement.

(bb) “Partnership Minimum Gain” shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(2).

3

(cc) “Partnership Property” shall mean the acquisition of up to 4.16666667% of the working interest which is approximately 3.0416666691% of the net revenue interest in the Seabreeze #2 Well and 3.33333333% of the working interest which is approximately 2.43333333% of the net revenue interest in the Seabreeze #3 Well. The Prospect will consist of oil and gas leases in Chambers County, Texas and the Prospect Wells will be drilled to a depth sufficient to test the Seabreeze A-1 Sand formation.

(dd) “Partnership Wells” shall mean the Partnership well sites on the Partnership Property which consists of oil and gas leases in Chambers County, Texas.

(ee) “Permitted Transfer” shall mean any transfer of Units satisfying the provisions of Section 7.2.

(ff) “Person” shall mean any individual, partnership, corporation, limited liability company, trust, or other entity.

(gg) “Placement Memorandum” shall mean that Private Placement Memorandum pursuant to which the Units are being offered and sold.

(hh) “Profits” and “Losses” shall mean, for each fiscal year or other period, an amount equal to the Partnership=s taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(1) Any income of the Partnership that is exempt from Federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be added to such taxable income or loss;

(2) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.1(hh) shall be subtracted from such taxable income or loss;

(3) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Sections 1.1(k)(2) or 1.1(k)(4), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purpose of computing Profits or Losses;

(4) Gain or loss resulting from any disposition of Partnership property with respect to which gain or loss is recognized for Federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.1(h); and

(6) Notwithstanding any other provisions of this Section 1.1(hh), any items which are specially allocated pursuant to this Agreement shall not be taken into account in computing Profits or Losses.

4

(ii) “Prospect” shall mean a contiguous Oil and Gas Interest, upon which drilling operations may be conducted. In general, a Prospect is an area in which the Partnership owns or intends to own one or more Oil and Gas Interests which is geographically defined on the basis of geological and geophysical data by the Managing General Partner and which is reasonably anticipated by the Managing General Partner to contain at least one reservoir. An area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more horizons. The area, which may be different for different horizons, shall be designated by the Managing General Partner in writing prior to the conduct of operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A “prospect” with respect to a particular horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a horizon containing proved reserves.

(jj) “Subscription Agreement” shall mean the agreement attached to the Placement Memorandum as Exhibit D, pursuant to which an investor subscribes to Units in the Partnership.

(kk) “Substitute Partner” shall mean any Person admitted to the Partnership as a Partner pursuant to Section 7.2(c).

(ll) “TMP” shall mean the tax matters partner of the Partnership for purposes of Code Sections 6621 through 6233.

(mm) “Unit” shall mean an interest of a Partner in the Partnership, each Unit representing a commitment to make a Capital Contribution of up to $50,500 to the Partnership.

(nn) “Working Interest” shall mean an interest in an oil and gas leasehold which is subject to some portion of the costs of development, operation, or maintenance.

1.2 Organization. The Managing General Partner and the Initial Limited Partner formed the Partnership pursuant to the provisions of the Act. The Partners hereby agree to continue the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement.

1.3 Partnership Name. The name of the Partnership shall be the “2013 Bayou City Seabreeze Offset Drilling Program, L.P.” and all business of the Partnership shall be conducted in such name. The Managing General Partner may change the name of the Partnership upon ten days notice to the Partners.

1.4 Character of Business. The principal business of the Partnership shall be to acquire leases, drill sites, and other interests in oil and/or gas properties and to drill for oil, gas, hydrocarbons, and other minerals located in, on, or under such properties, to produce and sell oil, gas, hydrocarbons, and other minerals from such properties, and to invest and generally engage in any and all phases of the oil and gas business. Such business purpose shall include, without limitation, the purchase, sale, acquisition, disposition, exploration, development, operation, and production of oil and gas properties of any character. Without limiting the foregoing, Partnership activities may be undertaken as principal, agent, general partner, syndicate member, partner, participant, or otherwise. The Opportunity Fund has been established to purchase performing loans at significant discounts. The fund is intended to generate cash flow from the loans held and to reinvest that cash flow for compounding returns.

1.5 Principal Place of Business. The principal place of business of the Partnership shall be at 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101. The Managing General Partner may change the principal place of business of the Partnership to any other place within the Commonwealth of Kentucky upon ten days notice to the Partners.

1.6 Term of Partnership. The Partnership commenced upon the filing of its Certificate of Limited Partnership, and shall continue until terminated as provided in Section 9.1.

5

1.7 Filings.

(a) A Certificate of Limited Partnership has been filed with the State of Kentucky in accordance with the provisions of the Act. The Managing General Partner shall take any and all other actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of Kentucky. The Managing General Partner shall cause amendments to the Certificate of Limited Partnership to be filed whenever required by the Act.

(b) The Managing General Partner shall execute and cause to be filed all such documents and shall take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership qualified to do business in any other states or jurisdictions in which the Partnership engages in business.

(c) Upon the dissolution of the Partnership, the Managing General Partner shall promptly execute and cause to be filed a Certificate of Cancellation in accordance with the Act and all such other documents as may be necessary for the Partnership to withdraw from any other states or jurisdictions in which the Partnership has qualified to do business.

1.8 Independent Activities. Each General Partner and each Limited Partner may, notwithstanding this Agreement, engage in whatever activities they choose, whether the same are competitive with the Partnership or otherwise, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner. Except as otherwise provided herein, however, the Managing General Partner and its Affiliates may pursue business opportunities that are consistent with the Partnership’s investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Neither this Agreement, nor any activity undertaken pursuant hereto, shall prevent the Managing General Partner from engaging in such activities, or require the Managing General Partner to permit the Partnership or any Partner to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by the Managing General Partner and the admission of each Partner, each Partner hereby waives, relinquishes, and renounces any such right or claim of participation. Notwithstanding the foregoing, the Managing General Partner still has a fiduciary obligation to the Partners.

2. Capitalization.

2.1 Capital Contributions of the Managing General Partner and Initial Limited Partner.

(a) The Managing General Partner shall make a Capital Contribution in cash to the Partnership of an amount equal to 10% of the aggregate Capital Contributions of the Partners. In consideration of making such Capital Contribution, becoming the Managing General Partner, subjecting its assets to the liabilities of the Partnership, and undertaking other obligations as herein set forth, the Managing General Partner shall receive the interest in the Partnership provided herein.

(b) On or before the date hereof, the Initial Limited Partner shall contribute $100 in cash to the capital of the Partnership. Upon the earlier to occur of (i) the conversion of an Additional General Partner’s interest into a Limited Partner interest, or (ii) the admission of another Limited Partner to the Partnership, the Partnership shall redeem in full, without interest or deduction, the Initial Limited Partner’s Capital Contribution, and the Initial Limited Partner shall cease to be a Partner.

6

2.2 Capital Contributions of the Partners.

(a) The interests of the Partners (other than the Managing General Partner) have been divided into 20 units (“Units”) for which each such Partner shall commit to contribute Fifty Thousand Five Hundred Dollars ($50,500). Upon execution of this Agreement, each initial Partner (whose names and addresses and number of Units for which the Partner has subscribed are set forth in Exhibit A) shall contribute to the capital of the Partnership the sum of $28,000 for each Unit purchased. In the event that the Managing General Partner determines, in its sole discretion, that completion of the Prospect Wells (as defined in the Placement Memorandum) is advisable, each initial Partner shall contribute to the capital of the Partnership the additional sum of $12,375 for the Seabreeze #2 Well and $10,125 for the Seabreeze #3 Well for each full Unit purchased. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay the additional Capital Contribution required to be made by such Partner within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

(b) Except as provided in Section 4.3, any proceeds of the offering of Units for sale pursuant to the Placement Memorandum not used, committed for use, or reserved as operating capital in the Partnership’s operations within one year after the closing of such offering shall be distributed pro rata to the Partners as a return of capital.

(c) Until proceeds from the offering of Units are invested in the Partnership’s operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments where there is appropriate safety of principal, such as U.S. Treasury obligations, certificate of deposits or money market accounts. Any such income shall be allocated pro rata to the Partners providing such Capital Contributions.

2.3 Additional Capital Contributions. After all Capital Contributions made pursuant to Sections 2.1 and 2.2 have been expended, if the Managing General Partner determines that additional capital is required for the Partnership’s business, the Managing General Partner shall give notice thereof to each of the Partners, and each of the Partners shall be obligated to make an additional Capital Contribution pro rata in accordance with the Capital Contributions previously made by each of them. Payment of any such additional Capital Contribution shall be due within seven days of the mailing of the notice by the Managing General Partner. If any Partner shall fail to pay an additional Capital Contribution required to be made by such Partner or that portion of the amount required to be contributed by the Partners pursuant to Sections 2.1 and 2.2 within seven days after the date due, such Partner shall be in default, and, in addition to all rights and remedies available to the Partnership at law, in equity or otherwise, the Managing General Partner shall have the right to set off against any distributions otherwise due to such Partner an amount equal to 300% of the amount which the Partner failed to contribute.

2.4 No Interest on Capital Contributions, No Withdrawals. No interest shall be paid on any Capital Contributions and, except as otherwise provided herein, no Partner, other than the Initial Limited Partner as authorized herein, may withdraw the Partner’s Capital Contribution.

3. Capital Accounts and Allocations.

3.1 Capital Accounts.

(a) A separate Capital Account shall be established and maintained for each Partner on the books and records of the Partnership. A Partner shall have a single Capital Account even though the Partner may be both a General Partner and a Limited Partner. Capital Accounts shall be maintained in accordance with Treas. Reg. Section 1.704-1(b) and any inconsistency between the provisions of this Section 3.1 and such regulation shall be resolved in favor of such regulation. In the event the Managing General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts are computed in order to comply with such regulation, the Managing General Partner may make such modification provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 9.3 upon the dissolution of the Partnership. The Managing General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership=s balance sheet, as computed for book purposes, in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Treas. Reg. Section 1.704-1(b).

7

(b) Each Partner’s Capital Account shall be credited with (i) the amount of money contributed by such Partner to the Partnership; (ii) the amount of any Partnership liabilities that are assumed by such Partner (within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)); (iii) the Gross Asset Value of property contributed by such Partner to the Partnership (net of liabilities secured by such contributed property that the Partnership is considered to assume or take subject to under Code Section 752); and (iv) allocations to such Partner of Profits (or items thereof), including income and gain exempt from tax and income and gain described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value).

(c) Each Partner’s Capital Account shall be debited with (i) the amount of money distributed to such Partner by the Partnership; (ii) the amount of such Partner’s individual liabilities that are assumed by the Partnership (other than liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership); (iii) the Gross Asset Value of property distributed to such Partner by the Partnership (net of liabilities secured by such distributed property that such Partner is considered to assume or take subject to under Code Section 752); (iv) allocations to such Partner of expenditures of the Partnership not deductible in computing Partnership taxable income and not properly chargeable to capital account (as described in Code Section 705(a)(2)(B)), and (v) allocations to such Partner of Losses (or item thereof), including Losses and deductions described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but excluding items described in (iv) above and excluding Losses or deductions described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to excess percentage depletion).

(d) Solely for purposes of maintaining the Capital Accounts:

(1) Each year the Partnership shall compute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each Oil and Gas Interest using that method, as between the cost depletion method and the percentage depletion method (without regard to the limitations of Code Section 613A(c)(3) which theoretically could apply to any Partner), which results in the greatest simulated depletion allowance. The simulated depletion allowance with respect to each Oil and Gas Interest shall reduce the Partners’ Capital Accounts in the same proportion as the Partners were allocated adjusted basis with respect to such Oil and Gas Interest under Section 3.3(a). In no event shall the Partnership’s aggregate simulated depletion allowance with respect to an Oil and Gas Interest exceed the Partnership’s adjusted basis in the Oil and Gas Interest (maintained solely for Capital Account purposes).

(2) Upon the taxable disposition of an Oil and Gas Interest by the Partnership, the Partnership shall determine the simulated (hypothetical) gain or loss with respect to such Oil and Gas Interest (solely for Capital Account purposes) by subtracting the Partnership’s simulated adjusted basis for the Oil and Gas Interest sold (maintained solely for Capital Account purposes) from the amount realized by the Partnership upon such disposition. Simulated adjusted basis shall be determined by reducing the adjusted basis by the aggregate simulated depletion charged to the Capital Accounts of all Partners in accordance with Section 3.1(d)(1). The Capital Accounts of the Partners shall be adjusted upward by the amount of any simulated gain on such disposition in proportion to such Partners= allocable share of the portion of total amount realized from the disposition of such Oil and Gas Interest that exceeds the Partnership’s simulated adjusted basis in such Oil and Gas Interest. The Capital Accounts of the Partners shall be adjusted downward by the amount of any simulated loss in proportion to such Partners’ allocable shares of the total amount realized from the disposition of such Oil and Gas Interest that represents recovery of the Partnership’s simulated adjusted basis in such Oil and Gas Interest.

8

(e) Except as otherwise provided in this Agreement, neither a Partner nor the Initial Limited Partner shall be obligated to the Partnership or to any other Partner to restore any negative balance in their Capital Accounts. Upon liquidation of the Partnership, or the liquidation of the interest of the Managing General Partner (in each case determined as provided in Treas. Reg. Section 1.704-1(b)(2)(ii)(g), if the Managing General Partner has a deficit balance in its Capital Account after crediting all Profit upon the sale of the Partnership’s assets which have been sold, and after making all allocations provided for herein, then the Managing General Partner shall be obligated to contribute to the Partnership, on or before the later to occur of (i) the close of the Partnership=s taxable year, or (ii) 90 days following such liquidation, an amount equal to such deficit balance for distribution in accordance with the terms of this Agreement.

3.2 Allocation of Profits and Losses and Costs and Expenses.

(a) Except as provided in this Section 3.2 or in Section 3.3, the following shall apply:

(1) Profits and Losses of the Partnership (computed without regard to the items referred to in Sections 3.2(a)(2) and 3.2(a)(3)) shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(2) Costs and expenses shall be allocated as follows:

(i)                  Organizational and syndication costs and expenses shall be allocated 100% to the Partners and 0% to the Managing General Partner;

(ii)                Tangible drilling, intangible drilling and development costs and expenses shall be allocated 90% to the Partners and 10% to the Managing General Partner; and

(iii)              Operating Costs shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(3) All items of revenue or income attributable to the Partnership shall be allocated 90% to the Partners and 10% to the Managing General Partner.

(b) Notwithstanding anything to the contrary in Section 3.3.2(a), no Partner shall be allocated any item to the extent that such allocation would create or increase a deficit in such Partner’s Capital Account. For purposes of this Section 3.2(b), in determining whether an allocation would create or increase a deficit in an Partner’s Capital Account, such Capital Account shall be reduced for those items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts which such Partner is obligated to restore in accordance with Treas. Reg. Section 1.704-1(b)(2)(ii)(c), or is deemed obligated to restore pursuant to Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Any item, the allocation of which to any Partner is prohibited by this Section 3.2(b), shall be reallocated to those Partners not having a deficit in their Capital Accounts (as adjusted as provided in this Section 3.2(b)) in the proportion that the positive balance of each such Partner’s adjusted Capital Account bears to the aggregate balance of all such Partners’ adjusted Capital Accounts, with any remaining losses or deductions being allocated to the Managing General Partner. Notwithstanding the provisions of Section 3.2(a), to the extent items are allocated to the Partners by virtue of the preceding provisions of this Section 3.2(b), the Profits thereafter recognized shall be allocated to such Partners (in proportion to the items previously allocated to them pursuant to this Section 3.2(b)) until such time as the Profits allocated to them pursuant to this sentence equals the items allocated to them pursuant to the preceding provisions of this Section 3.2(b).

(c) In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate (to the extent required by the regulations) the deficit balance in such Partner’s Capital Account (as adjusted in accordance with the provisions of Section 3.2(b)) as quickly as possible; provided, however, that an allocation pursuant to this Section 3.2(c) shall be made if and only to the extent that such Partner would have a deficit Capital Account (as adjusted in Section 3.2(b)) after all other allocations provided for in Section 3 have been tentatively made as if this Section 3.2(c) were not in this Agreement. It is the intention of the Partners that the provisions of this Section 3.2(c) constitute a “qualified income offset” within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), and such provisions shall be so construed.

9

(d) Notwithstanding any other provision of this Section 3.2, if there is a net decrease in Partnership Minimum Gain during any taxable year, all Partners shall be allocated items of Partnership income and gain for that year equal to that Partner’s share (within the meaning of Treas. Reg. Section 1.704-2(g)(2)) of the net decrease in Partnership Minimum Gain. Notwithstanding the preceding sentence, no such chargeback shall be made to the extent one or more of the exceptions and/or waivers provided for in Treas. Reg. Section 1.704-2(f) applies. This Section 3.2(d) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(f) and shall be interpreted consistently therewith.

(e) Notwithstanding any other provision of this Section 3.2, other than Section 3.2(d), if there is a net decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during any Partnership fiscal year, rules

similar to those contained in Section 3.2(d) shall apply in a manner consistent with Treas. Reg. Section 1.704-2(i)(4). This Section 3.2(e) is intended to comply with the minimum gain chargeback requirement of Treas. Reg. Section 1.704-2(i)(4) and shall be interpreted consistently therewith.

(f) Any Partner Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section 1.704-2(i)(1).

(g) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Sections 734(b) or 743(b) is required, pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such regulation.

(h) Notwithstanding anything in this Section 3.2, if as a result of the regulatory allocations provided for in Sections 3.2(c) through 3.2(f) the Managing General Partner determines that the Capital Accounts of the Partners do not reflect the economic agreement among the parties, the Managing General Partner, in its discretion, may adjust the allocations provided for in Section 3.2(a) so that the Capital Accounts of the Partners will be equal to the amount they would have been equal to had such regulatory allocations not been a part of this Agreement.

(i) The Partners are aware of the income tax consequences of the allocations made by this Section 3.2 and hereby agree to be bound by the provisions of this Section 3.2 in reporting their shares of Partnership income and loss for income tax purposes.

(j) For purposes of Code Section 752 and the regulations thereunder, the excess nonrecourse liabilities of the Partnership (within the meaning of Treas. Reg. Section 1.752-3(a)(3)), if any, shall be allocated 90% to the Partners and 10% to the Managing General Partner.

3.3 Depletion.

(a) The depletion deduction with respect to each Oil and Gas Interest of the Partnership shall be computed separately by each Partner in accordance with Code Section 613A(c)(7)(D) for Federal income tax purposes. For purposes of such computation, the adjusted basis of each Oil and Gas Interest shall be allocated in accordance with the Partners’ interests in the capital of the Partnership.

10

(b) Upon the taxable disposition of an Oil or Gas Interest by the Partnership, the amount realized therefrom shall be allocated among the Partners (for purposes of calculating their individual gain or loss on such disposition for Federal income tax purposes) as follows:

(1) The portion of the total amount realized upon the taxable disposition of such property that represents recovery of its simulated adjusted tax basis therein (as calculated pursuant to Section 3.1(d)) shall be allocated to the Partners in the same proportion as the aggregate adjusted basis of such property was allocated to such Partners (or their predecessors in interest) pursuant to Section 3.3(a); and

(2) The portion of the total amount realized upon the taxable disposition of such property that represents the excess over the simulated adjusted tax basis therein shall be allocated in accordance with the provisions of Section 3.1(d) as if such gain constituted an item of Profit.

3.4 Apportionment Among Partners.

(a) Except as otherwise provided in this Agreement, all allocations and distributions to the Partners shall be apportioned among them pro rata based upon the number of Units held by each of the Partners.

(b) For purposes of Section 3.4(a), a Partner’s pro rata share in Units shall be calculated as of the end of the taxable year for which such allocation has been made; provided, however, that if a transferee of a Unit is admitted as a Partner during the course of the taxable year, the apportionment of allocations and distributions between the transferor and transferee of such Unit shall be made in the manner provided in Section 3.4(c).

(c) If, during any taxable year of the Partnership, there is a change in any Partner’s interest in the Partnership, each Partner’s allocation of any item of income, gain, loss, deduction, or credit of the Partnership for such taxable year shall be determined by taking into account the varying interests of the Partners pursuant to such method as is permitted by Code Section 706(d) and the regulations thereunder.

4. Distributions.

4.1 Time of Distribution. The Managing General Partner shall distribute the Partnership’s Distributable Cash at such time as it shall determine, but such distributions shall be made not less frequently than quarterly.

4.2 Distributions. Except as provided in Section 4.3, all distributions (other than those made in connection with the liquidation of the Partnership, which distributions shall be made in accordance with Section 9.3) shall be made 90% to the Partners (and proportionally among them based upon their ownership of Units) and 10% to the Managing General Partner. In no event shall funds be advanced or borrowed for purposes of distributions if the amount of such distributions would exceed the Partnership’s accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied.

4.3 Capital Account Deficits. No distributions shall be made to any Partner to the extent such distribution would create or increase a deficit in such Partner’s Capital Account (as adjusted in Section 3.2(b)). If a distribution is not made to a Partner by reason of the preceding sentence, then the amount which would have been distributed to such Partner shall be distributed to the other Partners in the proportion that the positive Capital Account balance of each Partner bears to the aggregate positive Capital Account balances of all of the Partners. Any such amount remaining after reduction of all Capital Accounts to zero shall be distributed to the Managing General Partner.

5. Activities.

5.1 Management. The Managing General Partner shall conduct, direct, and exercise full and exclusive control over all activities of the Partnership. Partners shall have no power over the conduct of the affairs of the Partnership or otherwise commit or bind the Partnership in any manner. The Managing General Partner shall manage the affairs of the Partnership in a prudent and businesslike fashion and shall use its best efforts to carry out the purposes and character of the business of the Partnership.

11

5.2 Conduct of Operations.

(a) The Partners agree to participate in the Partnership’s program of operations as established by the Managing General Partner; provided, however, that no well drilled to the point of setting casing need be completed if, in the Managing General Partner’s opinion, such well is unlikely to be productive of oil or gas in quantities sufficient to justify the expenditures required for well completion. The Partnership may participate with others in the drilling of wells and it may enter into partnerships or other such arrangements.

(b) The Partnership shall not participate in any joint operations on any co-owned Lease unless there has been acquired or reserved on behalf of the Partnership the right to take in kind or separately dispose of its proportionate share of the oil and gas produced from such Lease, exclusive of production which may be used in development and production operations on the Lease and production unavoidably lost, and, if the Managing General Partner is the operator of such Lease, the Managing General Partner shall enter into written agreements with every other person or entity owning any working or operating interest reserving to such person or entity a similar right to take in-kind so as not to result in the Partnership being treated as a member of an association taxable as a corporation for Federal income tax purposes.

(c) The relationship of the Partnership and the Managing General Partner (or an Affiliate retaining or acquiring an interest) as co-owners in Leases, except to the extent superseded by an operating agreement consistent with the provisions of Section 5.2(c), and except to the extent inconsistent with this Agreement, shall be governed by the AAPL Form 610 Model Operating Agreement-1989, with a provision reserving the right to take production in-kind, naming the Partnership as a non-operator, and with the accounting procedure to govern as the accounting procedures under such operating agreements.

(d) The Managing General Partner is not expected to act as the operator of the Partnership Wells, and the Managing General Partner may designate such other persons as it deems appropriate to conduct the actual drilling and producing operations of the Partnership.

(e) The Partnership shall enter into a Turnkey Drilling Contract with the Managing General Partner or its Affiliates as described in the Placement Memorandum.

(f) The funds of the Partnership shall not be commingled with the funds of any other Person.

(g)The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner’s possession or control, and shall not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Partnership.

5.3 Acquisition and Sale of Leases.

(a) To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner or its Affiliate, the remainder of the interest in such Lease may be held by the Managing General Partner or such Affiliate, as applicable, which may retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner or its Affiliate to the exclusion of the Partnership. Any Leases acquired by the Partnership from the Managing General Partner or its Affiliate shall be acquired at the fair market value of such property.

12

(b) The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale or farmout unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership’s best interest.

5.4 Title to Leases.

(a) Record title to each Lease acquired by the Partnership may be temporarily held in the name of the Managing General Partner, or in the name of any nominee designated by the Managing General Partner, as agent for the Partnership until a productive well is completed on a Lease. Thereafter, the producing well (a/k/a the wellbore) shall be assigned to and placed in the name of the partnership.

(b) The Managing General Partner shall take the necessary steps in its best judgment to render title to the Leases to be assigned to the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on any Prospect acquired by the Partnership unless the Managing General Partner is satisfied that the undertaking of such operation would be in the best interest of Partners and the Partnership. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or Partners for any mistakes of judgment unless such mistakes were made in a manner not in accordance with general industry standards in the geographic area. Neither the Managing General Partner nor its Affiliates shall be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to any Lease assigned to the Partnership or the extent of the interest covered thereby.

5.5 Release, Abandonment, and Sale or Exchange of Properties. Except as provided elsewhere in Section 5 and in Section 6.3, the Managing General Partner shall have full power to dispose of the production and other assets of the Partnership, including the power to determine which Leases shall be released or permitted to terminate, those wells to be abandoned, whether any Lease or well shall be sold or exchanged, and the terms therefor.

5.6 Certain Transactions With Managing General Partner or Affiliates. Any services, equipment, or supplies which the Managing General Partner or an Affiliate furnishes to the Partnership which is not specifically referred to herein shall be furnished at a competitive rate which could be obtained in the geographical area of operations. Any such services for which the Managing General Partner or an Affiliate is to receive compensation shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid.

6. Managing General Partner.

6.1 Managing General Partner. The Managing General Partner shall have the sole and exclusive right and power to manage and control the affairs of and to operate the Partnership, to do all things necessary to carry on the business of the Partnership for the purposes described in Section 1.4 and to conduct the activities of the Partnership as set forth in Section 5. No financial institution or any other person, firm, or corporation dealing with the Managing General Partner shall be required to ascertain whether the Managing General Partner is acting in accordance with this Agreement, but such financial institution or such other person, firm, or corporation shall be protected in relying solely upon the deed, transfer, or assurance of, and the execution of such instrument or instruments by, the Managing General Partner. The Managing General Partner shall devote so much of its time to the business of the Partnership as in its judgment the conduct of the Partnership’s business shall reasonably require and shall not be obligated to do or perform any act or thing in connection with the business of the Partnership not expressly set forth herein. The Managing General Partner may engage in business ventures of any nature and description independently or with others and neither the Partnership nor any of the Partners shall have any rights in and to such independent ventures or the income or profits derived therefrom.

6.2 Authority of Managing General Partner. The Managing General Partner is specifically authorized and empowered, on behalf of the Partnership, and by consent of the Partners herein given, to do any act, execute any document or enter into any contract or any agreement of any nature necessary or desirable, in the opinion of the Managing General Partner, in pursuance of the purposes of the Partnership. Without limiting the generality of the foregoing, in addition to any and all other powers conferred upon the Managing General Partner pursuant to this Agreement and the Act, and except as otherwise prohibited by law or hereunder, the Managing General Partner shall have the power and authority to:

13

(a) Acquire Leases and other Oil and Gas Interests in furtherance of the Partnership’s business;

(b) Enter into and execute pooling agreements, farm out agreements, operating agreements, unitization agreements, dry and bottom hole and acreage contribution letters, construction contracts, and any and all documents or instruments customarily employed in the oil and gas industry in connection with the acquisition, sale, exploration, development, or operation of Oil and Gas Interests, and all other instruments deemed by the Managing General Partner to be necessary or appropriate to the proper operation of Oil or Gas Interests or to effectively and properly perform its duties or exercise its powers hereunder;

(c) Make expenditures and incur any obligations it deems necessary to implement the purposes of the Partnership, employ and retain such personnel as it deems desirable for the conduct of the Partnership’s activities, including employees, consultants, and attorneys and exercise on behalf of the Partnership, in such manner as the Managing General Partner, in its sole judgment, deems best, all rights, elections, and obligations granted to or imposed upon the Partnership;

(d) Manage, operate, and develop any Partnership property, and enter into operating agreements and other agreements with respect to properties acquired by the Partnership, including an operating agreement and turnkey drilling contract with the Managing General Partner as described in the Placement Memorandum, which agreements may contain such terms, provisions, and conditions as are usual and customary within the industry and as the Managing General Partner shall approve;

(e) Compromise, sue, or defend any and all claims in favor of or against the Partnership;

(f) Subject to the provisions of Section 8.4, make or revoke any election permitted the Partnership by any taxing authority;

(g) Perform any and all acts it deems necessary or appropriate for the protection and preservation of Partnership assets;

(h) Buy, sell, or lease property or assets on behalf of the Partnership;

(i) Enter into agreements to hire services of any kind or nature;

(j) Assign interests in properties to the Partnership;

(k) Enter into soliciting dealer agreements and perform all of the Partnership’s obligations thereunder, to issue and sell Units pursuant to the terms and conditions of this Agreement, the Subscription Agreements, and the Placement Memorandum, to accept and execute on behalf of the Partnership Subscription Agreements, and to admit Partners and Substitute Partners; and

(l) Perform any and all acts, and execute any and all documents, it deems necessary or appropriate to carry out the purposes of the Partnership.

6.3 Certain Restrictions on Managing General Partner’s Power and Authority. Notwithstanding any other provisions of this Agreement to the contrary, neither the Managing General Partner nor any of its Affiliates shall have the power or authority to, and shall not, do, perform, or authorize any of the following:

14

(a) Without having first received the prior consent of the holders of a majority of the then outstanding Units entitled to vote,

(1) sell all, or substantially all, of the assets of the Partnership (except upon liquidation of the Partnership pursuant to Section 9), unless cash funds of the Partnership are insufficient to pay the obligations and other liabilities of the Partnership;

(2) dispose of the goodwill of the Partnership; or

(3) do any other act which would make it impossible to carry on the ordinary business of the Partnership;

(b) Bind or obligate the Partnership with respect to any matter outside the scope of the Partnership business;

(c) Use the Partnership name, credit, or property for other than Partnership purposes;

(d) Utilize Partnership funds to invest in the securities of another Person except in the following instances:

(1) investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership’s business;

(2) temporary investments made in compliance with Section 2.2(c);

(3) investments which are a necessary and incidental part of a property acquisition transaction; and

(4) investments in entities established solely to limit the Partnership’s liabilities associated with the ownership or operation of property or equipment; provided, however, that in such instances duplicative fees and expenses shall be prohibited.

(e) Sell, transfer, or assign its interest (except for a collateral assignment which may be granted to a bank or other financial institution) in the Partnership, or any part thereof, or otherwise withdraw as Managing General Partner without written notice to the Partners.

6.4 Indemnification of Managing General Partner. The Managing General Partner shall have no liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the Managing General Partner if the Managing General Partner, in good faith, determined that such course of conduct was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that such course of conduct did not constitute gross negligence or willful misconduct of the Managing General Partner. The Managing General Partner shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses, and amounts paid in settlement of any claims sustained by it in connection with the Partnership, provided that the Managing General Partner has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Partnership, that the Managing General Partner was acting on behalf of or performing services for the Partnership, and that the same were not the result of gross negligence or willful misconduct on the part of the Managing General Partner. Indemnification of the Managing General Partner is recoverable only from the tangible net assets of the Partnership and the insurance and indemnification of the Partnership’s subcontractors, and is not recoverable from the Partners.

15

6.5 Withdrawal.

(a) Notwithstanding the limitations contained in Section 6.3(e), the Managing General Partner shall have the right, by giving written notice to the Partners, to substitute in its stead as Managing General Partner any successor entity or any entity controlled by the Managing General Partner, and the Partners, by execution of this Agreement, hereby expressly consent to such a transfer unless it would adversely affect the status of the Partnership as a partnership for Federal income tax purposes.

(b) The Managing General Partner may voluntarily withdraw from the Partnership after written notice to the Partners.

(c) In the event a Managing General Partner withdraws and the Partners elect to continue the Partnership, the withdrawing Managing General Partner’s interest in the assets of the Partnership shall be determined by independent appraisal by a qualified independent petroleum engineering consultant who shall be selected by mutual agreement of the Managing General Partner and the successor Managing General Partner. Such appraisal will take into account an appropriate discount to reflect the risk of recovery of oil and gas reserves. The withdrawn Managing General Partner shall be paid for its interest within ten days of the determination of the value of such interest.

6.6 Tax Matters Partner. The Managing General Partner shall serve as the Tax Matters Partner for purposes of Code Sections 6221 through 6233. The Partnership may engage its accountants and/or attorneys to assist the Tax Matters Partner in discharging its duties hereunder.

6.7 Organization and Offering Fee. The Partnership shall pay the Managing General Partner an Organization and Offering Fee of $94,267.

7. Partners.

7.1 Management. No Partner shall take part in the control or management of the business or transact any business for the Partnership, and no Partner shall have the power to sign for or bind the Partnership, all of such authority having been given to the Managing General Partner in Section 6. Any action or conduct of Partners on behalf of the Partnership is hereby expressly prohibited. Any Partner who violates the provisions of this Section 7.1 shall be liable to the remaining Partners, the Managing General Partner, and the Partnership for any damages, costs, or expenses any of them may incur as a result of such violation. Partners shall have the right to vote only with respect to those matters specifically provided for in these Sections.

7.2 Assignment of Units.

(a) A Partner may transfer all or any portion of the Partner’s Units, subject to the following conditions:

(1) No such assignment shall be made if, in the opinion of counsel to the Partnership, such assignment would cause the termination of the Partnership for federal income tax purposes under Section 708 of the Code or might result in a change in the status of the Partnership to a “publicly traded partnership” within the meaning of Section 7704 of the Code, or if in the opinion of counsel to the Partnership such assignment may not be effected without registration under the Securities Act of 1933, as amended, or would result in the violation of any applicable state securities laws;

(2) Except in the case of a transfer of Units at death, as a result of adjudication of incompetency or insanity, or involuntarily by operation of law, the transferor and transferee shall execute and deliver to the Partnership such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such transfer;

16

(3) The transferor and transferee shall furnish the Partnership with the transferee’s taxpayer identification number and sufficient information to determine the transferee’s initial tax basis in the Units transferred;

(4) The Partnership is reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such transfer; and

(5) If the transferor is an Additional General Partner, the Managing General Partner has consented to the transfer, which shall be in the sole discretion of the Managing General Partner.

(b) A Person who acquires one or more Units but who is not admitted as a Substitute Partner, shall only be entitled to allocations and distributions with respect to such Units in accordance with this Agreement, but shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of an Additional General Partner or a Limited Partner under the Act or this Agreement.

(c) Subject to the other provisions of Section 7, a transferee of Units may be admitted to the Partnership as a Substitute Partner only upon satisfaction of the following conditions:

(1) The Managing General Partner consents to such admission, which consent can be withheld in its absolute discretion;

(2) The Units with respect to which the transferee is being admitted were acquired by means of a Permitted Transfer;

(3) The transferee becomes a party to this Agreement as a Partner and executes such documents and instruments as the Managing General Partner may reasonably request as may be necessary or appropriate to confirm such transferee as a Partner of the Partnership and such transferee’s agreement to be bound by the terms and conditions hereof; and

(4) If the transferee is not an individual of legal majority, the transferee provides the Partnership with evidence satisfactory to counsel for the Partnership of the authority of the transferee to become a Partner and to be bound by the terms and conditions of this Agreement.

(d) In any calendar quarter in which a transfer of a Unit occurs, the Partnership shall recognize the assignment not later than the last day of the calendar month following receipt of notice of assignment and required documentation.

(e) Each Partner hereby covenants and agrees with the Partnership, for the benefit of the Partnership and all Partners, that (i) the Partner is not currently making a market in Units and (ii) the Partner will not transfer any Unit on an established securities market or a secondary market (or the substantial equivalent thereof) within the meaning of Code Section 7704(b) (and any regulations, proposed regulations, revenue rulings, or other official pronouncements of the Internal Revenue Service that may be promulgated or published thereunder). Each Partner further agrees that the Partner will not transfer any Unit to any Person unless such Person agrees to be bound by the provisions of this Section 7.2 and to transfer such Units only to Persons who agree to be similarly bound.

7.3 Prohibited Transfers.

(a) Any purported Transfer of Units that is not a Permitted Transfer shall be null and void and of no effect whatever. If, however, the Partnership is required by a court of competent jurisdiction to recognize a transfer that is not a Permitted Transfer (or if the Managing General Partner, in its sole discretion, elects to recognize a transfer that is not a Permitted Transfer), the Partnership shall have the right (without limiting any other legal or equitable rights of the Partnership) to withhold distributions to which such transferee would otherwise be entitled and apply such distributions to satisfy the debts, obligations, or liabilities for damages that the transferor or transferee of such Units may have to the Partnership.

17

(b) In the case of a transfer or attempted transfer of Units that is not a Permitted Transfer, the parties engaging or attempting to engage in such transfer shall be liable to indemnify and hold harmless the Partnership and the other Partners from all cost, liability, and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and lawyers fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby.

7.4 Withdrawal by Partners. A Partner may not withdraw from the Partnership, except as otherwise provided in this Agreement.

7.5 Calling of Meetings. Partners owning 20% or more of the then outstanding Units entitled to vote shall have the right to request that the Managing General Partner call a meeting of the Partners. The Managing General Partner shall call such a meeting and shall deposit in the United States mails within 15 days after receipt of such request written notice to all Partners of the meeting and the purpose of the meeting, which shall be held on a date not less than 30, nor more than 60, days after the date of the mailing of such notice, at a reasonable time and place. Partners shall have the right to submit proposals to the Managing General Partner for inclusion in the voting materials for the next meeting of Partners for consideration and approval by the Partners. Partners shall have the right to vote in person or by proxy.

7.6 Voting Rights. Partners shall be entitled to all voting rights granted to them under this Agreement and as specified by the Act. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Except as otherwise provided herein, at any meeting of Partners, a vote of a majority of Units represented at such meeting, in person or by proxy, with respect to matters considered at the meeting at which a quorum is present shall be required for approval of any such matters.

7.7 Voting by Proxy. The Partners may vote either in person or by proxy.

7.8 Conversion of Additional General Partner Units to Limited Partner Interests.

(a) Automatic Conversion. After the Partnership Wells have been drilled and completed, the Managing General Partner shall file an amended certificate of limited partnership with the Secretary of State of the state of Kentucky for the purpose of converting the Additional General Partner Units to Limited Partners interests.

(b) Additional General Partners Shall Have Contingent Liability. Upon conversion the Additional General Partners shall be Limited Partners entitled to limited liability; however, they shall remain liable to the Partnership for any additional Capital Contribution required for their proportionate share of any Partnership obligation or liability arising before the conversion of their Units as provided in Section 3.05(b)(2).

(c) Conversion Shall Not Affect Allocations. The conversion shall not affect the allocation to any Participant of any item of Partnership income, gain, loss, deduction or credit or other item of special tax significance other than Partnership liabilities, if any. Further, the conversion shall not affect any Participant’s interest in the Partnership’s oil and gas properties and unrealized receivables.

7.9 Liability of Partners. Except as otherwise provided in this Agreement or the Act, each Additional General Partner shall be jointly and severally liable for the debts and obligations of the Partnership. In addition, each Additional General Partner shall be jointly and severally liable for any wrongful acts or omissions of the Managing General Partner and/or the misapplication of money or property of a third party by the Managing General Partner acting within the scope of its apparent authority to the extent such acts or omissions are chargeable to the Partnership.

18

8. Books and Records.

8.1 Books and Records.

(a) For accounting and income tax purposes, the Partnership shall operate on a calendar year.

(b) The Managing General Partner shall keep just and true records and books of account with respect to the operations of the Partnership and shall maintain and preserve during the term of the Partnership and for four years thereafter all such records, books of account, and other relevant Partnership documents. The Managing General Partner shall maintain for at least six years all records necessary to substantiate the fact that Units were sold only to purchasers for whom such Units were suitable. Such books shall be maintained at the principal place of business of the Partnership and shall be kept on the accrual method of accounting.

(c) The Managing General Partner shall keep or cause to be kept complete and accurate books and records with respect to the Partnership’s business, which books and records shall at all times be kept at the principal office of the Partnership. Any records maintained by the Partnership in the regular course of its business, including the names and addresses of Partners, books of account, and records of Partnership proceedings, may be kept on any electronic information storage device; provided, however, that the records so kept are convertible into clearly legible written form within a reasonable period of time. The books and records of the Partnership shall be made available for review by any Partner or the Partner’s representative at any reasonable time.

(d) The Participant List shall be maintained as a part of the books and records of the Partnership and shall be available for the inspection by any Partner or such Partner’s designated agent at the principal office of the Partnership upon the request of any Partner and shall be updated at least quarterly to reflect changes in the information contained therein.

8.2 Reports. The Managing General Partner shall deliver to each Partner the following financial statements and reports at the times indicated below:

(a) By March 15 of each year, a report containing such information as to enable each Partner to prepare and file such Partner’s Federal income tax return.

(b) Such other reports and financial statements as the Managing General Partner shall determine from time to time.

8.3 Bank Accounts. All funds of the Partnership shall be deposited in such separate bank account or accounts, short term obligations of the U.S. Government or its agencies, or other interest-bearing investments and money market or liquid asset mutual funds as shall be determined by the Managing General Partner. All withdrawals therefrom shall be made upon checks signed by the Managing General Partner or any person authorized to do so by the Managing General Partner.

8.4 Federal Income Tax Elections.

(a) Except as otherwise provided in this Section 8.4, all elections required or permitted to be made by the Partnership under the Code shall be made by the Managing General Partner in its sole discretion. Each Partner agrees to provide the Partnership with all information necessary to give effect to any election to be made by the Partnership.

(b) The Partnership shall elect to currently deduct intangible drilling and development costs as an expense for income tax purposes and shall require any partnership, joint venture, or other arrangement in which it is a party to make such an election.

19

9. Dissolution; Winding-Up.

9.1 Dissolution.

(a) Except as otherwise provided herein, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, or bankruptcy of any Partner shall not dissolve the Partnership. The successor to the rights of such Partner shall have all the rights of an Partner for the purpose of settling or administering the estate or affairs of such Partner; provided, however, that no successor shall become a Substitute Partner except in accordance with Section 7; and provided further that upon the occurrence of any of the events referred to in the first sentence of this Section 9.1(a) with respect to an Additional General Partner, the Partnership shall be dissolved and wound up unless at that time there is at least one other Additional General Partner, in which event the business of the Partnership shall continue to be carried on. Neither the expulsion of any Partner, nor the admission or substitution of an Partner, shall work a dissolution of the Partnership. The estate of a deceased, insane, incompetent, or bankrupt Partner shall be liable for all his liabilities as a Partner.

(b) Notwithstanding anything in the Act to the contrary, the Partnership shall be dissolved upon, but not before, the earliest to occur of (i) the written consent of the Managing General Partner and Partners owning a majority of the then outstanding Units to dissolve and wind up the affairs of the Partnership; (ii) subject to the provisions of Section 9.1(c), the retirement, withdrawal, removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in the case of a corporate Managing General Partner, the withdrawal, removal, filing of a certificate of dissolution, liquidation, or bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or abandonment of all, or substantially all, of the Partnership’s property and the sale and/or collection of any evidences of indebtedness received in connection therewith; (iv) December 31, 2043 or (v) a dissolution event described in Section 9.1(a).

(c) In the case of any event described in Section 9.1(b)(ii), if a successor Managing General Partner is selected by Partners owning a majority of the then outstanding Units within 90 days after such event, and if such Partners agree within such 90 day period to continue the business of the Partnership, then the Partnership shall not be dissolved.

(d) If, notwithstanding the provisions of this Agreement, the retirement, withdrawal, removal, death, insanity, incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a Partner’s interest in the Partnership, or the substitution or admission of a new Partner, shall be deemed under the Act to cause a dissolution of the Partnership, then, except as provided in Section 9.1(c), the remaining Partners may, in accordance with the Act, continue the Partnership business as a new partnership and all such remaining Partners agree to be bound by the provisions of this Agreement.

9.2 Liquidation. Upon a dissolution of the Partnership, the Managing General Partner, or in the event there is no Managing General Partner, any other Person selected by the Partners to act as the liquidator, shall cause the affairs of the Partnership to be wound up and shall take account of the Partnership’s assets (including Capital Contributions, if any, of the Managing General Partner pursuant to Section 3.1(e)) and, subject to the provisions of Section 9.3(b) shall be liquidated as promptly as is consistent with obtaining the fair market value thereof (which dissolution and liquidation may be accomplished over a period spanning one or more tax years in the sole discretion of the Managing General Partner or the liquidator), and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in accordance with Section 9.3.

9.3 Winding-Up.

(a) Upon the dissolution of the Partnership and winding up of its affairs, the assets of the Partnership shall be distributed as follows:

20

(1) all of the Partnership’s debts and liabilities to Persons other than to Partners shall be paid and discharged;

(2) to the establishment of any cash reserves which the Managing General Partner or liquidator determines to create in their sole discretion for unmatured and/or contingent liabilities or obligations of the Partnership; and

(3) to the Partners, in accordance with their respective Capital Accounts; provided, however, that if the Managing General Partner or liquidator establishes any reserves in accordance with the provisions of Section 9.3(a)(2), then the distributions pursuant to this Section 9.3(a)(3) (including distribution of any released reserves) shall be pro rata in accordance with the balances of the Partners’ Capital Accounts.

(b) Distributions pursuant to Section 9.3 shall be made in cash or in kind to the Partners, at the election of the Managing General Partner. Notwithstanding the provision of this Section 9.3(b), in no event shall the Partners reserve the right to take in kind and separately dispose of their share of production.

(c) Any in kind property distributions to the Partners shall be made to a liquidating trust or similar entity for the benefit of the Partners, unless at the time of the distribution:

(1) the Managing General Partner shall offer the individual Partners the election of receiving in kind property distributions and the Partners accept such offer after being advised of the risks associated with such direct ownership; or

(2) there are alternative arrangements in place which assure the Partners that they will not, at any time, be responsible for the operation or disposition of Partnership properties.

10. Power of Attorney.

10.1 Managing General Partner as Attorney-in-Fact. Each Partner makes, constitutes, and appoints the Managing General Partner their true and lawful attorney-in-fact, with full power of substitution, in the name, place, and stead of the Partner, from time to time to make, execute, sign, acknowledge, and file:

(a) Any notices or certificates as may be required under the Act and under the laws of any other state or jurisdiction in which the Partnership shall engage, or seek to engage, to do business and to do such other acts as are required to constitute the Partnership as a limited partnership under such laws.

(b) Any amendment to the Agreement pursuant to and which complies with Section 11.9.

(c) Such certificates, instruments, and documents as may be required by, or may be appropriate under the laws of any state or other jurisdiction in which the Partnership is doing or intends to do business.

(d) Such certificates, instruments, and documents as may be required by, or as may be appropriate for the Partner to comply with, the laws of any state or other jurisdiction to reflect a change of name or address of the Partner.

(e) Such certificates, instruments, and documents as may be required to be filed with the Department of Interior (including any bureau, office or other unit thereof, whether in Washington, D.C. or in the field, or any officer or employee thereof), as well as with any other federal or state agencies, departments, bureaus, offices, or authorities and pertaining to (i) any and all offers to lease, Leases (including amendments, modifications, supplements, renewals, and exchanges thereof) of, or with respect to, any lands under the jurisdiction of the United States or any state including, without limitation, lands within the public domain, and acquired lands, and provides for the leasing thereof, (ii) all statements of interest and holdings on behalf of the Partnership or the Partner; (iii) any other statements, notices, or communications required or permitted to be filed or which may hereafter be required or permitted to be filed under any law, rule, or regulation of the United States, or any state relating to the leasing of lands for oil or gas exploration or development, (iv) any request for approval of assignments or transfers of oil and gas Leases, any unitization or pooling agreements and any other documents relating to lands under the jurisdiction of the United States or any state; and (v) any other documents or instruments which said attorney-in-fact, in its sole discretion, shall determine should be filed.

21

(f) Any further document, including furnishing verified copies of this Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider necessary or convenient in connection with any of the foregoing, hereby giving said attorney-in-fact full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the foregoing as fully as the undersigned might and could do if personally present, and hereby ratifying and confirming all that said attorney-in-fact shall lawfully do to cause to be done by virtue hereof.

10.2 Nature as Special Power. The foregoing grant of authority:

(a) is a special power of attorney coupled with an interest, is irrevocable, and shall survive the death or incompetency of the Partner granting it;

(b) shall survive the delivery of any assignment by the Partner of the whole or any portion of the Partner’s Units; except that where the assignee thereof has been approved by the Managing General Partner for admission to the Partnership as a Substitute Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file any instrument necessary to effect such substitution; and

(c) may be exercised by said attorney-in-fact by a listing of all of the Partners executing any instrument with a single signature of said attorney-in-fact.

11. Miscellaneous Provisions.

11.1 Liability of Parties. By entering into this Agreement, no party shall become liable for any other party’s obligations relating to any activities beyond the scope of this Agreement, except as provided by the Act. If any party suffers, or is held liable for, any loss or liability of the Partnership which is in excess of that agreed upon herein, such party shall be indemnified by the other parties, to the extent of their respective interests in the Partnership, as provided herein.

11.2 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an officer of the party to whom the same is directed or sent by registered or certified mail, postage and charges prepaid, addressed as follows (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section):

(a) If to the Managing General Partner, 632 Adams Street, Suite 710, Bowling Green, Kentucky 42101.

(b) If to a Partner, at such Partner’s address for purposes of notice which is set forth on Exhibit A attached hereto. Unless otherwise expressly set forth in this Agreement to the contrary, any such notice shall be deemed to be given on the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and sent as aforesaid.

11.3 Paragraph Headings, Section References. The headings in the Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. All references herein to Sections shall refer to Sections of this Agreement unless the context clearly requires otherwise.

22

11.4 Severability. Every portion of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Agreement.

11.5 Sole Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and no amendment, modification, or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly approved and executed by the Managing General Partner and such percentage of Partners as provided in Section 11.9.

11.6 Applicable Law. This Agreement, shall be governed by, and construed in accordance with, the laws of the State of Kentucky without regard to its conflict of law rules.

11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had all signed the same document. All counterparts shall be construed together and shall constitute one agreement.

11.8 Waiver of Action for Partition. Each Partner irrevocably waives, during the term of the Partnership, any right that such Partner may have to maintain any action for partition with respect to the Partnership and the property of the Partnership.

11.9 Amendments.

(a) Unless otherwise specifically herein provided, this Agreement shall not be amended without the consent of Partners owning a majority of the then outstanding Units entitled to vote.

(b) The Managing General Partner may, without notice to, or consent of, any Partner, amend any provisions of this Agreement, or consent to and execute any amendment to this Agreement, to reflect:

(1) A change in the name or location of the principal place of business of the Partnership;

(2) The admission of Substitute Partners or additional Partners in accordance with this Agreement;

(3) A reduction in, return of, or withdrawal of, all or a portion of any Partner’s Capital Contribution;

(4) A correction of any typographical error or omission;

(5) A change which is necessary in order to qualify the Partnership as a limited partnership under the laws of any other state or which is necessary or advisable, in the opinion of the Managing General Partner, to ensure that the Partnership will be treated as a partnership and not as an association taxable as a corporation for Federal income tax purposes;

(6) A change in the allocation provisions, in accordance with the provisions of Section 3.2(a), in a manner that, in the sole opinion of the Managing General Partner (which opinion shall be determinative), would result in the most favorable aggregate consequences to the Partners as nearly as possible consistent with the allocations contained herein, for such allocations to be recognized for Federal income tax purposes due to developments in the Federal income tax laws or otherwise; or

23

(7) Any other amendment similar to the foregoing; provided however, that the Managing General Partner shall have no authority, right, or power under this Section 11.9(b) to amend the voting rights of the Partners.

11.10 Substitution of Signature Pages. This Agreement has been executed in duplicate by the Partners and one executed copy of the signature page is attached to the Partner’s copy of this Agreement. It is agreed that the other executed copy of such signature page may be attached to an identical copy of this Agreement together with the signature pages from counterpart Agreements which may be executed by other Partners.

11.11 Incorporation by Reference. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference.

24

2013 Bayou City Seabreeze Offset Drilling Program, L.P.

PARTNERSHIP AGREEMENT SIGNATURE PAGE

__________ Number of Units of Limited Partnership interest

__________ Number of Units of General Partnership interest

__________	Cash Payment - $50,500 per Unit to be paid as follows:
	$28,000 payable upon subscription for the drilling and testing of the Partnership Wells. (Payable to “AB & T, Escrow Agent for the 2013 Bayou City Seabreeze Offset Drilling Program, L.P.”)
	$12,375 payable when the Managing General Partner decides to complete the Seabreeze #2 Well (Payable to “2013 Bayou City Seabreeze Offset Drilling Program, L.P.”)
	$10,125 payable when the Managing General Partner decides to complete the Seabreeze #3 Well (Payable to “2013 Bayou City Seabreeze Offset Drilling Program, L.P.”)

REGISTRATION INFORMATION

Print Name	Print Name of Joint Owner (if applicable)
Social Security Number or Tax ID Number	Social Security Number or Tax ID Number
Drivers License Number	Drivers License Number
X	X
Signature	Signature of Joint Owner
Mailing Address:	SELLING BROKER/DEALER’S ACCEPTANCE
	Broker/Dealer:
	Date:
Home Ph #:	DEALER MANAGER’S ACCEPTANCE
Work Ph #:	Source Capital Group, Inc., as Dealer Manager, herewith accepts the foregoing subscription.
Email:
	Source Capital Group, Inc.
	Date:

Check One:			PARTNERSHIP’S ACCEPTANCE
	Individual	IRA
	J/T/W/R/O/S	Keogh	Bayou City Exploration, Inc., as Managing General
	Partnership	TIC	Partner, herewith accepts the foregoing
	Trust Created on _____	Corporation	subscription in the 2013 Bayou City
	Limited Liability	Community Property	Seabreeze Offset Drilling Program, L.P.
	Company
			Stephen C. Larkin, President
			Date:

25

EXHIBIT A

TO

AGREEMENT OF LIMITED PARTNERSHIP

OF

2013 Bayou City Seabreeze Offset Drilling Program, L.P.

Names and Addresses of Investors Nature of Interest Number of Units

26

EX-10.8

Exhibit 10.8

TURNKEY DRILLING CONTRACT

THIS AGREEMENT is made and entered into as of the 8^th day of March, 2013 by and between the parties herein designated as "Partnership" and "Contractor."

Partnership:	2013 Bayou City Seabreeze Offset Drilling Program, L.P.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101
Contractor:	Bayou City Exploration, Inc.
Address:	632 Adams Street, Suite 710
	Bowling Green, Kentucky 42101

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained, Partnership engages Contractor as an Independent Contractor to furnish the equipment, labor and services to drill, test, and complete its working interest portion, as per Exhibit “1”, of the wells to be drilled on the Partnership Prospect in Chambers County, Texas in search of oil and/or gas.

As a Management Fee for the supervision and management of the affairs of the Partnership during the work over, drilling and testing periods of Initial Operations, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Drilling Price over the actual cost of such operations. Likewise, during the completion period of Initial Operations, if completion is attempted on the Prospect Wells, the Managing General Partner will receive an amount equal to the excess, if any, of the Turnkey Completion Price over the actual costs of such operations. The Managing General Partner intends to enter into one or more Operating Agreements (the “Operating Agreements”) with third party operators which will perform certain services with respect to the work over, drilling, testing and, if applicable, completion of the Prospect Wells. We cannot accurately predict the actual amount constituting compensation to be paid to any third party operator for its services under the Operating Agreements and therefore, it also cannot accurately predict the excess amount, if any, of the Turnkey Drilling Price over the actual cost of such operations that the Managing General Partner will receive. Costs to be expended under the Operating Agreements are a direct result of the work over, drilling, testing and completion risks encountered. During work over, drilling, testing and completion operations, a variety of conditions may be encountered, such as loss of circulation, blowouts, detachment and/or loss of drilling equipment, necessity for the purchase and installation of down-hole equipment to keep the wellbore intact, and repair of inadequate cement to hold production casing in place. As such costs are unpredictable with any degree of certainty, in the event of totally uneventful operations, compensation payable pursuant to the Operating Agreements could equal or exceed the actual work over, drilling, testing and completion costs. Likewise, in the event that a series of major difficulties are encountered, these costs could equal or exceed the amount of Initial Capital, and Bayou City Exploration, Inc. would be responsible for such excess costs. Bayou City Exploration, Inc. may use any funds it receives from management fees and/or profits, if any, for any purpose, including payment of General and Administrative Expenses of Bayou City Exploration, Inc. such as employee salaries and office expenses.

1.             LOCATION OF PARTNERSHIP WELL(S):

See Exhibit "1" attached hereto and made a part hereof.

1

2.             TERMINATION DATE:

Contractor agrees to use its best efforts to complete operations for the acquisition, drilling and testing of the Partnership Wells by September 30, 2013, and Contractor and the Partnership agree that time is of the essence under this Agreement.

3.             BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:

Contractor shall be paid at the following rate for the work performed hereunder:

Turnkey Drilling Price ($490,167) and Completion Price in the event that completion is attempted ($402,000) = Total $892,167.

4.             DEPTH:

Subject to the right of the Partnership to direct the stoppage of work at any time (as provided in paragraph 7), the Partnership Wells shall be drilled to the depth as specified in Exhibit “1” or to the depth at which the production casing (production string) is set, whichever depth is first reached, which depth is hereinafter referred to as the “Contract Depth.”

5.             TIME OF PAYMENT:

5.1 Basis: Payment by the Partnership to the Contractor of the Drilling Price becomes due and payable upon the receipt by the Partnership of an invoice from the Contractor. Neither commencement nor completion of Contractor’s performance shall be a condition precedent to this obligation to pay.

5.2 Attorneys’ Fees: If this Agreement is placed in the hands of an attorney for collection of any sums due hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or probate proceedings, then the Partnership agrees that there shall be added to the amount due reasonable attorneys' fees and costs.

6.             COMPLETION PROGRAM:

The Contractor, in its capacity as Managing General Partner of the Partnership (the “Managing General Partner”), along with other participating Partnership Well working interest owners, shall determine whether Contractor shall set a production string on the Prospect Wells.  In the event the Managing General Partner directs that drilling operations cease and to abandon the Partnership Wells, Contractor shall plug the Partnership Wells, remove all drilling apparatus from the well sites and the obligations of the parties hereunder shall cease.  In the event the Managing General Partner directs Contractor to set a production string on the Prospect Wells and makes timely payment to the Contractor of the Completion Price, Contractor shall commence the operations necessary to attempt to complete the Prospect Wells for commercial production, including the setting of a production string and the acquisition, delivery and installation of a pump jack, holding tank and all other necessary equipment needed to extract and contain oil and/or gas from the Partnership Wells.

7.             STOPPAGE OF WORK BY THE PARTNERSHIP:

Notwithstanding the provisions of paragraph 3 with respect to the depth to be drilled, the Managing General Partner shall have the right to direct the stoppage of the work to be performed by the Contractor hereunder at any time prior to reaching the Contract Depth and even though Contractor has made no default hereunder.  If the Partnership exercises its right to discontinue drilling the well(s), the Partnership will not receive a refund for any unused portion of the Drilling Price allocable to the discontinued well(s).

2

8.             REPORTS TO BE FURNISHED BY CONTRACTOR:

8.1 Contractor shall keep and furnish to the Partnership an accurate record of the work performed and formations drilled on the IADC-API Daily Drilling Report form or other form acceptable to the Partnership.  A legible copy of said form signed by Contractor’s representative shall be furnished by Contractor to the Partnership.

8.2 Delivery tickets, if requested by the Partnership, covering any material or supplies furnished by the Partnership shall be turned in each day with the daily drilling report.  The quantity, description and condition of materials and supplies so furnished shall be checked by Contractor and such tickets shall be properly certified by Contractor.

9.             RESPONSIBILITY FOR A SOUND LOCATION:

Contractor shall prepare a sound location, adequate in size and capable of properly supporting the drilling rig.  Contractor shall be responsible for a conductor pipe program adequate to prevent soil and subsoil washout.  In the event subsurface conditions cause a cratering or shifting of the location surface, and loss or damage to the rig or its associated equipment results therefrom, the Partnership shall not be responsible for reimbursing Contractor for any such loss or damage including payment of work stoppage rate during repair and/or demobilization if applicable.

10.           RESPONSIBILITY FOR ROAD AND LOCATIONS:

Contractor agrees at all times to maintain roads to locations and each location in such a condition that will allow free access and movement to and from the drilling site in an ordinarily equipped highway type vehicle.

11.           PAYMENT OF CLAIMS:

Contractor agrees to pay all claims for labor, material, services and supplies to be furnished by Contractor hereunder, and agrees to allow no lien or charge to be fixed upon the lease, the Partnership Wells or other property of the Partnership or the land upon which said Partnership Wells are located.

12.           RESPONSIBILITY FOR LOSS OR DAMAGE:

12.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times for damage to or destruction of Contractor’s surface equipment, including but not limited to all drilling tools, machinery and appliances, for use above the surface, regardless of when or how such damage or destruction occurs.

12.2 Contractor’s In-Hole Equipment Basis: Contractor shall assume liability at all times for damage to or destruction of Contractor’s in-hole equipment, including but not limited to drill pipe, drill collars and tool joints, and the Partnership shall be under no liability to reimburse Contractor for any such loss.

3

12.3 Partnership’s Equipment: The Partnership shall assume liability at all times for any defective equipment owned by it, including but not limited to casing, tubing, well head equipment, and Contractor shall be under no liability to reimburse the Partnership for any such loss or damage.

12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole for any cause attributable to Contractor's operators be lost or damaged while Contractor is engaged in the performance of work hereunder, all such loss of or damage to the hole including cost of regaining control of a fire or blowout, shall be borne by Contractor; and if the hole is not in condition to be carried to the Contract Depth as herein provided, Contractor shall, if requested by the Partnership, commence a new hole without delay at Contractor's cost; and the drilling of the new hole shall be conducted under the terms and conditions of this Agreement in the same manner as though it were the first hole and Contractor shall be responsible for replacement of any casing lost in a junked and abandoned hole as well as the cost of preparing a new drill site for the new hole and the road thereto.  In such case, Contractor shall not be entitled to any payment or compensation for expenditures made or incurred by Contractor on or in connection with the abandoned hole.

13.           NO WAIVER EXCEPT IN WRITING:

It is fully understood and agreed that none of the requirements of this Agreement shall be considered as waived by either party unless the same is done in writing, and then only by the persons executing this Agreement, or other duly authorized agent or representative of the party.

14.           FORCE MAJEURE:

If either party hereto is rendered unable, wholly or in part (and its performance hereunder is not rendered merely commercially impracticable) by force majeure to carry out its obligation under this Agreement, it shall give the other party prompt written notice of the force majeure with reasonably full particulars.  Thereupon, the obligations of the notifying party, so far as they are affected by the force majeure, shall be suspended during, but not longer than, the continuance of the force majeure, and the notifying party agrees to use reasonable diligence to remove the force majeure as quickly as possible.  This paragraph shall not relieve either party hereto for its obligations to expend sums of money or to indemnify the other party hereto, as provided elsewhere in this Agreement. The term "force majeure" as herein employed shall mean an act of God, strike, lockout or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, extreme weather conditions, or governmental restraint.

15.           INFORMATION CONFIDENTIAL:

Upon written request by the Partnership, information obtained by Contractor in the conduct of drilling operation on the Partnership Wells, including, but not limited to depth, formations penetrated, the results of coring, testing and surveying, shall be considered confidential and shall not be divulged by Contractor or its employees, to any person, firm or any corporation other than the Partnership’s designated representative.

16.           NOTICES AND PLACE OF PAYMENT:

All notices to be given with respect to this Agreement unless otherwise provided for shall be given to Contractor and to the Partnership respectively at the addresses hereinabove shown.  All sums payable hereunder to Contractor shall be payable at the address hereinabove shown unless otherwise specified herein.

4

BAYOU CITY EXPLORATION, INC.

By: /s/ Stephen C. Larkin

        Stephen C. Larkin, President & CEO

2013 Bayou City Seabreeze Offset Drilling Program, L.P.,

A KENTUCKY LIMITED PARTNERSHIP

By:  Bayou City Exploration, Inc.

        Managing General Partner

By: /s/ Stephen C. Larkin

       Stephen C. Larkin, President & CEO

5

EXHIBIT "1" TO EXHIBIT "C"

March 8, 2013

The primary investment objective of the Partnership is, assuming all Units are sold, the acquisition of up to 4.16666667% of the working interest which is approximately 3.0416666691% of the net revenue interest in the Seabreeze #2 Well and 3.33333333% of the working interest which is approximately 2.43333333% of the net revenue interest in the Seabreeze #3 Well. The Prospect will consist of oil and gas leases in Chambers County, Texas and the Prospect Wells will be drilled to a depth sufficient to test the Seabreeze A-1 Sand formation.

6

EX-31.1

EXHIBIT 31.1

SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND

CHIEF FINANCIAL OFFICER

I, Stephen C. Larkin, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended June 30, 2013 of Bayou City Exploration, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15(d)-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal controls over financial reporting, or caused such control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: August 14, 2013	/s/ Stephen C. Larkin
	Stephen C. Larkin
	President and Chief Financial Officer

1

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Bayou City Exploration, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen C. Larkin, President, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company

/s/ Stephen C. Larkin

Stephen C. Larkin

President, Chief Executive Officer and Chief Financial Officer

August 14, 2013

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this certification has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

1

XML

4. OIL AND GAS PROPERTIES (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Property, Plant and Equipment [Line Items]
Proved oil and gas properties	$ 900,693
Total oil and gas properties	900,693
Less accumulated depletion and amortization	(493,288)
Less impairment
Net oil and gas properties	407,405	340,053
Oil And Gas Properties [Member]
Property, Plant and Equipment [Line Items]
Proved oil and gas properties		776,540
Total oil and gas properties		776,540
Less accumulated depletion and amortization		(436,487)
Less impairment
Net oil and gas properties		$ 340,053

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
OPERATING REVENUES:
Oil and gas sales	$ 75,036	$ 22,626	$ 183,342	$ 92,194
Turnkey drilling contract revenue	215,858		559,726	1,578,697
TOTAL OPERATING REVENUES	290,894	22,626	743,068	1,670,891
OPERATING COSTS AND EXPENSES:
Lease operating expenses and production taxes	(4,737)	25,016	(6,721)	44,132
Abandonment and dry hole costs	24,469		24,469
Depletion, depreciation, and amortization	28,694	5,884	60,379	33,873
Turnkey drilling contract costs	104,300	7,562	273,768	661,746
Marketing Costs	11,894	179,656	58,019	254,074
General and administrative costs	244,614	188,610	392,947	326,830
TOTAL OPERATING COSTS	409,234	406,728	802,861	1,320,655
OPERATING INCOME (LOSS)	(118,340)	(384,102)	(59,793)	350,236
OTHER INCOME (EXPENSE):
Miscellaneous income (expense)	200		10,303
Equity in earnings from affiliated company	8,725	80,781	36,800	80,781
NET INCOME BEFORE INCOME TAX PROVISION	(109,415)	(303,321)	(12,690)	431,017
Income tax benefit	29,686
NET INCOME	$ (79,729)	$ (303,321)	$ (12,690)	$ 431,017
NET INCOME PER COMMON SHARE - BASIC	$ (0.08)	$ (0.31)	$ (0.01)	$ 0.61
NET INCOME PER COMMON SHARE - DILUTED	$ (0.08)	$ (0.31)	$ (0.01)	$ 0.61
Weighted average common shares outstanding -
Basic	990,230	990,036	990,230	704,710
Diluted	990,230	990,036	990,230	704,710

XML

5. COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 5 - COMMITMENTS AND CONTINGENCIES

Commitments

As of June 30, 2013, neither the Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

As the managing general partner of the Company’s investment partnerships, the Company’s operations are subject to environmental protection regulations established by federal, state, and local agencies that may necessitate significant capital outlays that, in turn, would materially affect the financial position and business operations of the Company. These regulations, enacted to protect against waste, conserve natural resources and prevent pollution, could necessitate spending funds on environmental protection measures, rather than on drilling operations. Because these laws and regulations change frequently and are becoming increasingly more stringent, the costs to the Company of compliance with existing and future environmental regulations and the overall impact on the Company’s operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed on the Company for violating such regulations, the Company’s operations could be adversely affected.

XML

1. BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 1 - BASIS OF PRESENTATION

The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2012 and subsequent filings with the SEC.

The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.

XML

3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 3 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Sale of Common Stock to Related Parties

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 700,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private offering (the “Offering”) at a price of $0.005 per share, for total consideration to the Company valued at $350,000.  The Investors included Charles T. Bukowski, Jr., the Company’s former President and a former member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s President and Chief Financial Officer as well as a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder, and G2 International, Inc., a consultant to the Company. Of the $350,000, $327,500 was collected in cash and $22,500 was issued in satisfaction of payment for consulting services.

As of June 30, 2013, there were 990,230 shares of Common Stock issued and outstanding. Stephen C. Larkin, President, Director and Chief Financial Officer of the Company, beneficially owns approximately 27.06% of the issued and outstanding Common Stock as a result of his purchase in the Offering.

Payables and Notes Payable to Related Parties

As of June 30, 2013 and December 31, 2012, the Company had the following debts and obligations to related parties:

	June 30, 2013		December 31, 2012
Note Payable to a minority shareholder		100,000		100,000
Total Note Payable to a minority shareholder	$	100,000	$	100,000

During the fourth quarter 2007, Peter Chen, a minority shareholder, loaned the Company $100,000 to finance the Company’s operations. The Company executed a written promissory note on October 4, 2007 which is due on demand and bears an interest rate of 0%.

The Opportunity Funds and Affiliated Partners

In April 2011, the Company acquired a 25% ownership interest in Affiliated Partners, a general partnership formed for the purpose of holding an 80% interest in Loanmod, LLC, a Delaware limited liability company (“Loanmod”). Affiliated Partners is also owned by our President, Chief Executive Officer, Chief Financial Officer and director, Stephen Larkin (50%) and our other director, Travis Creed (25%). The Company acquired its interest in Affiliated Partners in exchange for its agreement to serve as the managing member and investment manager of the Opportunity Fund VII, LLC, a Delaware limited liability company (the “Opportunity Fund VII”), which invests in mortgage notes and land contracts secured by real estate. The Company also serves as the managing member and investment manager of the BYCX Opportunity Fund I (“BYCX Fund I”), established in June 2011, and the Opportunity Fund VIII, LLC (the “Opportunity Fund VIII,” and collectively with the other managed funds, the “Opportunity Funds”), established February 2013, both of which are also Delaware limited liability companies that invest in mortgage notes and land contracts. The purchases of mortgage notes and land contracts by the Opportunity Funds are facilitated primarily by Loanmod, which receives income in connection with its acquisition of mortgage notes and land contracts for the Opportunity Funds. In the event that an Opportunity Fund acquire mortgage notes and land contracts from an unaffiliated party, Loanmod is entitled to a transaction fee from such Opportunity Fund equal to 2.5% of the purchase price of all mortgage notes and land contracts acquired from such third party.

Bonus Payment to Chief Executive Officer

In February 2013, the Company paid Stephen Larkin, its President, Chief Executive Officer and Chief Financial Officer, a bonus of $27,750 (the “2012 Bonus”). The 2012 Bonus was based upon the Company’s performance during the 2012 fiscal year.

XML

6. STOCKHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 6 - STOCKHOLDERS' EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As of June 30, 2013, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as Common Stock, of which 990,230 were outstanding, and 5,000,000 shares designated as preferred stock, of which no shares were outstanding.

Issuance of Equity Securities

As described in Note 3 above, on March 8, 2012, the Company conducted a private offering pursuant to which the Company sold 700,000 shares of the Company’s Common Stock for total consideration to the Company valued at $350,000.  The consideration for the Common Stock was paid primarily in cash, however, the shares issued to one Investor were issued in exchange for settlement of outstanding invoices for consulting services rendered.

During the six months ended June 30, 2013, the Company did not issue any equity securities.

Stock Options

During the six months ended June 30, 2013, the Company did not issue any options to purchase shares of the Company’s Common Stock, and no outstanding options were exercised during this period.

Reverse Split of Common Stock

On July 26, 2012, the Company effected a 1 for 100 reverse stock split of the Company’s Common Stock, resulting in a reduction of the number of shares outstanding of the Company from approximately 99,003,633 to approximately 990,000. At June 30, 2013, the Company had 990,230 shares of Common Stock outstanding. Persons holding less than 100 shares of Common Stock received one share of Common Stock. The rights and privileges of the holders of shares of Common Stock were substantially unaffected by the reverse stock split. All issued and outstanding options, warrants and convertible securities were appropriately adjusted for the reverse stock split automatically on the effective date of the reverse stock split, and have been presented in the financial statements to adjust for the reverse stock split.

XML

4. OIL AND GAS PROPERTIES

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 4 - OIL AND GAS PROPERTIES

Oil and Gas properties, stated at cost, consisted of the following:

	June 30, 2013			December 31, 2012
Proved oil and gas properties	$	900,693		$	776,540
Total oil and gas properties		900,693			776,540
Less accumulated depletion and amortization		(493,288	)		(436,487	)
Less impairment		—			—
Net oil and gas properties	$	407,405		$	340,053

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Statement of Financial Position [Abstract]
Preferred stock par value	$ 0.001	$ 0.001
Preferred stock shares authorized	5,000,000	5,000,000
Preferred stock shares issued	0	0
Preferred stock shares outstanding	0	0
Common stock par value	$ 0.005	$ 0.005
Common stock shares authorized	150,000,000	150,000,000
Common stock shares issued	990,230	990,230
Common stock shares outstanding	990,230	990,230

XML

4. OIL AND GAS PROPERTIES (Tables)

6 Months Ended

Jun. 30, 2013

Oil and Gas Property [Abstract]

OIL AND GAS PROPERTIES

Oil and Gas properties, stated at cost, consisted of the following:

	June 30, 2013			December 31, 2012
Proved oil and gas properties	$	900,693		$	776,540
Total oil and gas properties		900,693			776,540
Less accumulated depletion and amortization		(493,288	)		(436,487	)
Less impairment		–			–
Net oil and gas properties	$	407,405		$	340,053

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss)	$ (12,690)	$ 431,017
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation, depletion, and amortization	60,379	33,873
Abandonments and dry holes	24,469
Equity in earnings of affiliated company	(36,800)
Stock issued for services		22,500
Change in operating assets and liabilities:
Accounts receivable - trade	1,151	(10,477)
Receivable from partnerships	(419,447)
Prepaid expenses and other	(361,470)
Accounts payable and accrued liabilities	(5,267)	(138,420)
Turnkey partnership obligation	585,637	183,855
Accounts payable - related party	(530,611)
Federal income tax payable	(32,697)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	(727,346)	522,348
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties	(148,622)	(4,568)
Purchase of investments		(209,947)
Cash received from unconsolidated affiliated company	150,099
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	1,477	(214,513)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing stock		327,500
NET CASH PROVIDED BY FINANCING ACTIVITIES		327,500
NET INCREASE (DECREASE) IN CASH	(725,869)	635,335
CASH AT BEGINNING OF PERIOD	2,087,480	1,259,934
CASH AT END OF PERIOD	$ 1,361,611	$ 1,895,269

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2013	Dec. 31, 2012
CURRENT ASSETS:
Cash	$ 1,361,611	$ 2,087,480
Accounts receivable:
Trade and other	59,639	60,790
Receivable due from affiliates	523,614	104,167
Prepaid expenses and other	478,612	117,142
TOTAL CURRENT ASSETS	2,423,476	2,369,579
OIL AND GAS PROPERTIES, NET	407,405	340,053
OTHER FIXED ASSETS, NET	16,102	19,680
OTHER INVESTMENTS AT COST	126,128	126,128
INVESTMENT IN UNCONSOLIDATED AFFILIATE COMPANY	36,800	150,099
INVESTMENTS HELD FOR SALE	190,000	190,000
TOTAL ASSETS	3,199,911	3,195,539
CURRENT LIABILITIES:
Accounts payable and accrued liabilities	48,686	53,953
Accounts payable - minority shareholder	84,906	84,906
Turnkey partnership obligation	1,168,383	582,746
Accounts payable - related party		530,611
Notes payable - minority shareholders	100,000	100,000
Federal income taxes payable		32,697
TOTAL CURRENT LIABILITIES	1,401,975	1,384,913
TOTAL LIABILITIES	1,401,975	1,384,913
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2013 and December 31, 2012
Common stock, $0.005 par value; 150,000,000 shares authorized; 990,230 shares outstanding at June 30, 2013 and December 31, 2012	4,951	4,951
Additional paid in capital	13,912,814	13,912,814
Accumulated deficit	(12,119,829)	(12,107,139)
TOTAL STOCKHOLDERS' EQUITY	1,797,937	1,810,626
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 3,199,911	$ 3,195,539

XML

3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (Tables)

6 Months Ended

Jun. 30, 2013

Related Party Transactions [Abstract]

Payables and Notes Payable to Related Parties

	June 30, 2013		December 31, 2012
Note Payable to a minority shareholder		100,000		100,000
Total Note Payable to a minority shareholder	$	100,000	$	100,000

XML

3. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (Details) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Related Party Transactions [Abstract]
Note Payable to a minority shareholder	$ 100,000	$ 100,000
Total Note Payable to a minority shareholder	$ 100,000	$ 100,000

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Revenue Recognition

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

Accounts Receivable

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of June 30, 2013, there were no accounts receivable considered potentially uncollectible.

Managed Limited Partnerships

The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of each limited partnership as its Managing General Partner, and accounts for the investment under proportionate consolidation. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively. 

Consolidation Policy

The Company consolidates its interest in joint ventures and partnerships in the oil and gas industry using the “proportionate consolidation” method provided for in Accounting Standards Codification (ASC) Topic 810-10-45-14, Consolidation – Other Presentation Matters.   A proportionate consolidation is permitted when the Company does not control the joint venture or partnership but nonetheless exercises significant influence.  Under this method, the Company recognizes its proportionate share of each partnership’s assets, liabilities, revenues and expenses, which are included in the appropriate classifications on the Company’s consolidated financial statements. 

All significant intercompany transactions of its consolidated subsidiary and the limited partnerships are eliminated.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

(1) the costs of acquiring mineral interest in properties,

(2) costs to drill and equip exploratory wells that find proved reserves,

(3) costs to drill and equip development wells, and

(4) costs for support equipment and facilities used in oil and gas producing activities.

These costs are depreciated, depleted or amortized on the unit of production method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.

The costs of drilling exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired and its costs are charged to expense. At June 30, 2013 and December 31, 2012 the Company had $0 in capitalized costs pending determination.

Other Dispositions

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

Impairment of Long-Lived Assets

The Company follows the provisions of ASC Subtopic 360-35, “Property, Plant and Equipment – Subsequent Measurement.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with ASC 932-235, “Disclosures about Oil and Gas Producing Activities.”

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statements of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At June 30, 2013, the cash balances were at $1,361,611.

Offering Related Expenses

The Company expenses marketing-related offering expenses as these are incurred. Marketing expenses totaled $58,019 and $254,074 in the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

Accounts Receivable

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of June 30, 2013, there were no accounts receivable considered potentially uncollectible.

Managed Limited Partnerships

The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of each limited partnership as its Managing General Partner, and accounts for the investment under proportionate consolidation. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively.

Consolidation Policy

The Company consolidates its interest in joint ventures and partnerships in the oil and gas industry using the “proportionate consolidation” method provided for in Accounting Standards Codification (ASC) Topic 810-10-45-14, Consolidation – Other Presentation Matters.   A proportionate consolidation is permitted when the Company does not control the joint venture or partnership but nonetheless exercises significant influence.  Under this method, the Company recognizes its proportionate share of each partnership’s assets, liabilities, revenues and expenses, which are included in the appropriate classifications on the Company’s consolidated financial statements. 

All significant intercompany transactions of its consolidated subsidiary and the limited partnerships are eliminated.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

(1) the costs of acquiring mineral interest in properties,

(2) costs to drill and equip exploratory wells that find proved reserves,

(3) costs to drill and equip development wells, and

(4) costs for support equipment and facilities used in oil and gas producing activities.

These costs are depreciated, depleted or amortized on the unit of production method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.

The costs of drilling exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired and its costs are charged to expense. At June 30, 2013 and December 31, 2012 the Company had $0 in capitalized costs pending determination.

Other Dispositions

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

Impairment of Long-Lived Assets

The Company follows the provisions of ASC Subtopic 360-35, “Property, Plant and Equipment – Subsequent Measurement.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with ASC 932-235, “Disclosures about Oil and Gas Producing Activities.”

Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statements of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At June 30, 2013, the cash balances were at $1,361,611.

Offering Related Expenses

The Company expenses marketing-related offering expenses as these are incurred. Marketing expenses totaled $58,019 and $254,074 in the six months ended June 30, 2013 and 2012, respectively.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

XML

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Accounting Policies [Abstract]
Marketing-related offering expenses	$ 58,019	$ 254,074

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 10, 2013
Document And Entity Information
Entity Registrant Name	BAYOU CITY EXPLORATION, INC.
Entity Central Index Key	0001050957
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		990,230
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013