Offshore Operations

Contango

Contango directly and through REX and COE conducts exploration activities in the Gulf of Mexico. As of August 22, 2008, Contango, through its wholly-owned subsidiaries, COI and CRC, and its partially-owned subsidiaries, REX and COE, had an interest in 67 offshore leases.

As of June 30, 2008, Contango owned a 32.3% equity interest in REX and a 65.6% equity interest in COE, both of which were formed for the purpose of generating exploration opportunities in the Gulf of Mexico. These companies focus on identifying prospects, acquiring leases at federal and state lease sales and then selling the prospects to third parties, including Contango, subject to timed drilling obligations plus retained reversionary interests in favor of REX and COE.

Republic Exploration LLC

Effective April 1, 2008, the Company sold a portion of its ownership interest in REX to an existing member of REX for approximately $0.8 million. As a result of the sale, the Company's equity ownership interest in REX has decreased to 32.3%.

On April 3, 2008, the members of REX entered into an Amended and Restated Limited Liability Company Agreement (the "REX LLC Agreement"), effective as of April 1, 2008, to, among other things, distribute REX's interest in Dutch and Mary Rose to the individual members of REX or their designees. In connection with this distribution, REX repaid in full all amounts owing by REX to a private investment firm under a $50.0 million demand promissory note with such private investment firm (the "REX Demand Note"), and all security interests and other liens granted in favor of such private investment firm as security for the obligations under the REX Demand Note have been released and terminated. The Company's portion of such repayment was approximately $22.5 million.

On March 12, 2008, the Company announced that its wildcat exploration well at High Island A198, a REX prospect, was determined to be a dry hole, at a cost of approximately $4.2 million. The well has been plugged and abandoned.

West Delta 36 and Eugene Island 113-B, two REX prospects, are operated by a third party. The Company depends on third-party operators for the operation and maintenance of these production platforms. On March 7, 2008, REX elected to convert its 3.67% overriding royalty interest in West Delta 36 to an undivided 25% working interest, sometimes referred to herein as "WI". As of August 21, 2008, West Delta 36, in which REX has a 20.0% net revenue interest, sometimes referred to herein as "NRI", was producing at a rate of approximately 9.7 million cubic feet equivalent per day ("Mmcfed"), and Eugene Island 113-B, in which REX has a 3.3% NRI, was temporarily shut-in.

Contango Offshore Exploration LLC

Effective April 1, 2008, the Company sold a portion of its ownership interest in COE to an existing member or COE for approximately $0.9 million. As a result of the sale, the Company's equity ownership interest in COE has decreased to 65.6%.

Grand Isle 72 ("Liberty"), a COE prospect operated by COI, began producing in March 2007 and as of August 22, 2008 was producing at a rate of approximately 0.2 Mmcfed. COE has invested approximately $5.5 million ($3.6 million net to the Company) in drilling, completion, pipeline and production facility costs as of June 30, 2008. COE has a 50% WI and a 40% NRI in this well. As of June 30, 2008, COE had borrowed $4.3 million from the Company under a promissory note (the "Note") to fund a portion of its share of development costs at Grand Isle 72. The Note bears interest at a per annum rate of 10% and is payable upon demand. As of June 30, 2008, accrued interest thereon was $668,816.

Grand Isle 70, another COE prospect, was drilled by COI in July 2006 and proved to be a discovery. The well has been temporarily abandoned while alternative development scenarios are being evaluated. COE has a 45.1% WI before completion of the well and a 52.6% WI after completion of the well, while COI has a 3.6% WI before and after completion of the well. As of June 30, 2008, COE and COI had invested approximately $3.6 million to drill Grand Isle 70.

Ship Shoal 358, a COE prospect, is operated by a third party. The Company depends on third-party operators for the operation and maintenance of non-operated production platforms. As of August 12, 2008, Ship Shoal 358, in which COE has a 10.0% WI and 7.7% NRI, was producing at an 8/8ths rate of approximately 2.1 Mmcfed.

Contango Operators, Inc.

COI, a wholly-owned subsidiary of the Company, was formed for the purpose of drilling exploration and development wells in the Gulf of Mexico. COI operates and acquires significant working interests in offshore exploration and development opportunities in the Gulf of Mexico, usually under a farm-out agreement, or similar agreement, with either REX or COE. COI expects to take working interests in these prospects under the same arms-length terms offered to industry third-party participants. In exchange for acting as operator, COI will receive a 10% ground floor working interest in all future wells. COI will pay the remaining 90% working interest and carry the owner of the lease (either REX or COE) for a 10% working interest through the tanks until initial production is achieved. Following a casing point election, the lease owner (either REX or COE) shall have an option to acquire a 25% working interest from COI. COI may also operate and acquire significant working interests in offshore exploration and development opportunities under farm-in agreements with third parties.

COI has recently drilled a well ("Eloise #1") on State of Louisiana leases at a depth below our Mary Rose discovery. The Company, through REX and COI participation, subject to elections for certain carried interests, has an approximate 54.17% WI in this well and is responsible for approximately $12.5 million of drilling costs. COI has agreed to provide REX with a carried interest in this well through the tanks. At casing point, REX "backed-in" for an additional working interest from COI and COI's WI was reduced to approximately 36.90%. The Company expects to invest an additional $3.8 million to complete the well.

Effective February 1, 2008, the Company sold COI's overriding royalty interest in Eugene Island 113-B, Ship Shoal 358 and Grand Isle 72 to JEX for $164,400.

Contango Resources Company

CRC is a wholly-owned subsidiary of Contango formed for the sole purpose of drilling and operating exploration and development wells in our Dutch and Mary Rose leases in the Gulf of Mexico. Unlike COI, CRC will not acquire additional working interests in offshore exploration and development opportunities in the Gulf of Mexico.

Current Activities

As of August 20, 2008, our three Dutch wells were flowing at a combined 8/8ths production rate of approximately 108.8 Mmcfed (approximately 41.5 Mmcfed net to Contango). The Company has invested approximately $33.8 million to drill and complete these three Dutch wells, including pipeline and production facility costs. The three Dutch wells flow to a third-party owned and operated production platform at Eugene Island 24. This platform has a capacity of 100 million cubic feet per day ("Mmcfd") and 3,000 barrels of oil per day ("bopd").

As of August 22, 2008, our four Mary Rose wells were flowing at a combined 8/8ths production rate of approximately 193.8 Mmcfed (approximately 71.4 Mmcfed net to Contango). The Company has invested approximately $69.1 million to drill and complete these four Mary Rose wells, including pipeline and production facility costs. The four Mary Rose wells flow into the Company's recently completed production platform at Eugene Island 11, and through its associated pipeline into the ANR Pipeline Company facilities at Eugene Island 63. The gas is then processed on-shore near Patterson, Louisiana. The platform has been designed with a capacity of 500 Mmcfd and 6,000 bopd and the pipeline has been designed with a capacity of 330 Mmcfd and 6,000 bopd.

On April 3, 2008, the Company acquired additional working interests in the Eugene Island 10 ("Dutch") and State of Louisiana ("Mary Rose") discoveries in a like-kind exchange, using funds from the sale of its Eastern core Arkansas Fayetteville Shale properties held by a qualified intermediary. The Company purchased an additional 4.17% working interest and 3.33% net revenue interest in Dutch and an additional average 4.56% working interest and 3.33% net revenue interest in Mary Rose from three different companies for $100 million. The effective date of the transaction was January 1, 2008. On February 8, 2008, the Company purchased an additional 0.3% overriding royalty interest in the Dutch and Mary Rose discoveries for $9.0 million in a like-kind exchange, using funds from the sale of its Eastern core Arkansas Fayetteville Shale properties held by a qualified intermediary.

On January 3, 2008, the Company acquired an additional 8.33% working interest and 6.67% net revenue interest in Dutch and an additional average 9.11% working interest and 6.67% net revenue interest in Mary Rose from three different companies for $200 million, in a like-kind exchange, using funds from the sale of its Western core Arkansas Fayetteville Shale properties held by a qualified intermediary. The effective date of the transaction was January 1, 2008. As of August 22, 2008, the Company had a 47.05% working interest and 38.12% net revenue interest in Dutch, and an average 53.21% working interest and 37.00% net revenue interest in Mary Rose.

The Company's independent third party engineer estimates the Dutch and Mary Rose discoveries to have total proved 8/8ths reserves as at June 30, 2008 of approximately 948 billion cubic feet equivalent ("Bcfe") (366 Bcfe net to Contango). The Company has budgeted approximately $7.1 million to drill its first rate acceleration well ("Dutch #4") in this field beginning September 2008, and may drill additional rate acceleration wells to fully exploit its Dutch and Mary Rose discoveries.

The Minerals Management Service ("MMS") has implemented a rule on royalty relief for shallow water, deep shelf natural gas production from certain Gulf of Mexico leases. "Deep shelf gas" refers to natural gas produced from depths greater than 15,000 feet in waters of 200 meters or less. Royalty relief is available on the first 15 billion cubic feet ("Bcf") of natural gas production if produced from an interval between 15,000 to less than 18,000 feet. Royalty relief is available on the first 25 Bcf of natural gas production if produced from an interval between 18,000 to less than 20,000 feet. Royalty relief is available on the first 35 Bcf of natural gas production if produced from well depths at or greater than 20,000 feet. This royalty relief is expected to have a positive impact on the economics of deep gas wells drilled on the shelf of the Gulf of Mexico. The Company fully utilized its available MMS deep gas royalty relief in December 2007.