CONSULTING AND NON-COMPETITION AGREEMENT

EXHIBIT 10.1

CONSULTING AND NON-COMPETITION AGREEMENT

This CONSULTING AND NON-COMPETITION AGREEMENT (“Agreement”) is made and entered into by Steffen E. Palko, an individual (“Mr. Palko”), and XTO Energy Inc., a Delaware corporation (the “Company”).

RECITALS:

A. Mr. Palko is one of the founders and is a director, the Vice Chairman and President of the Company, which was created in 1986, and has participated in building the Company into a major independent exploration and production company and a member of the S&P 500.

B. Mr. Palko has special expertise in the oil and gas business and has intimate knowledge of the confidential information owned by the Company.

C. Mr. Palko desires to retire from the Company, and the Company desires to (i) acknowledge Mr. Palko’s contribution to the Company, (ii) protect confidential information of the Company, (iii) retain his expertise in oil and gas operations, (iv) resolve any claims that may have arisen during the term of employment, and (v) ensure that Mr. Palko will not compete against the Company.

D. The Compensation Committee and Board of Directors of the Company have determined that it is in the best interests of the Company and its stockholders to enter into this Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Defined Terms. When used in this Agreement, the following terms will have the following meanings:

“Affiliate” means, with respect to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is under common control with such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the actual power to direct or cause the direction of the management and policies of a Person, whether through the ownership of stock, by contract, credit arrangement or otherwise.

“Affiliated Entities” means XTO Energy Inc. and each of its Subsidiaries and Affiliates.

“Business Enterprise” means any corporation, partnership, limited liability company, sole proprietorship, joint venture, joint stock company, bank, association, trust, trust company, land trust, business trust or other business association or entity.

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“Company Oil and Gas Interests” means all Oil and Gas Interests in which any of the Affiliated Entities has any ownership, working, income and/or net profits interest, including without limitation fee or leasehold interest.

“Competing Business” means any Oil and Gas Business on or with respect to the Territory.

“Confidential Information” means all information relating to the Affiliated Entities and/or the Company Oil and Gas Interests, including without limitation information relating to title matters, environmental matters, financial statements and other financial matters, the engineering reports reflecting the Company Oil and Gas Interests, estimates of reserves, quality of reserves, geological matters, asset listings, production and operating costs, production capabilities, marketing, tax, forecasts and projections, in whatever form (whether documentary, computer storage or other).

“Consulting Fee” shall have the meaning defined in Section 3.

“Consulting Period” means the period beginning on the Retirement Date and ending on October 31, 2006.

“Consulting Services” shall have the meaning defined in Section 3.

“Derivative Information” means any notes, summaries, evaluations, analyses and other material derived by Mr. Palko from any of the Confidential Information.

“Employment Related Contracts” means Mr. Palko’s Amended and Restated Employment Agreement dated May 17, 2000, as amended August 20, 2002, and Employee’s Agreement for Grant of Performance Shares dated February 20, 2001, as amended October 15, 2004.

“Equity Interest” means the equity ownership rights in a Business Enterprise, whether in the form of capital stock, ownership unit, limited liability company interest, limited or general partnership interest or any other form of ownership, or any right, option, warrant, convertible security or indebtedness or other instrument enabling any Person to acquire any of the same.

“Hydrocarbons” means oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons.

“Non-Compete Payment” shall have the meaning defined in Section 4(d).

“Oil and Gas Business” means owning, managing, acquiring, attempting to acquire, soliciting the acquisition of, operating, controlling or developing Oil and Gas Interests, or engaging in, or being connected with, as a principal, owner, officer, director, employee, shareholder, promoter, consultant, contractor, partner, member, joint venturer, agent, owner of any Equity Interest or in any other capacity whatsoever, any Business Enterprise engaged in any of the foregoing activities or in any aspect of the oil and gas exploration and production business.

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“Oil and Gas Interests” means (a) direct and indirect interests in or rights with respect to oil, gas, mineral and related properties (including revenues therefrom) and assets of any kind and nature, direct or indirect, including without limitation working, royalty and overriding royalty interests, mineral interests, leasehold interests, production payments, operating rights, net profits interests, other non-working interests and non-operating interests; (b) interests in or rights with respect to Hydrocarbons or other minerals or revenues therefrom or contracts or agreements in connection therewith or claims and rights thereto (including without limitation oil and gas leases, operating agreements, unitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements and, in each case, interests thereunder), surface interests, fee interests, reversionary interests, reservations and concessions; (c) easements, rights of way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; and (d) interests in equipment and machinery (including without limitation well equipment and machinery), oil or gas production, gathering, transmission, compression, treating, processing and storage facilities (including without limitation tanks, tank batteries, pipelines and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries and other tangible personal property and fixtures associated with, appurtenant to, or necessary for the operation of any of the foregoing, regardless of location.

“Person” means any natural person, Business Enterprise or governmental authority.

“Restricted Group” means (a) each member of Mr. Palko’s immediate family who lives in his household, and (b) any Business Enterprise in which Mr. Palko, any one or more members of Mr. Palko’s immediate family who lives in his household or Mr. Palko and one or more members of Mr. Palko’s immediately family who lives in his household collectively own or have the right to acquire an Equity Interest in excess of 5%, or otherwise have any right, through the ownership of a voting interest or otherwise, to direct the activities of such Business Enterprise.

“Restricted Period” means the period beginning on the Retirement Date and ending on October 31, 2006.

“Retirement Benefits” shall have the meaning defined in Section 7.

“Retirement Date” means 12:01 a.m. May 1, 2005.

“Subsidiary” means, with respect to any Person, any entity, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such Person or by one or more of its respective Subsidiaries.

“Territory” means the United States of America.

2. Consideration. Mr. Palko has entered into this Agreement and made the covenants hereinafter set forth (i) in connection with his retirement from the Company; (ii) in connection

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with the Company’s desire to protect the Confidential Information; (iii) in connection with the Company’s agreement to retain Mr. Palko to provide consulting services to the Company; (iv) to resolve any claims that may have arisen during the term of Mr. Palko’s employment; and (v) to ensure that Mr. Palko will not compete against the Company.

3. Consulting Arrangement.

(a) The Company hereby retains Mr. Palko effective as of the Retirement Date to render such consulting and advisory services (the “Consulting Services”) as the Company may reasonably request from time to time during the Consulting Period. Mr. Palko hereby accepts such engagement and agrees to perform Consulting Services upon the terms and conditions set forth in this Agreement. Mr. Palko shall perform the Consulting Services at such times and places as an officer designated by the Company or the Board of Directors of the Company shall from time to time reasonably request.

(b) As compensation for the Consulting Services, Mr. Palko shall receive $55,000 per calendar month plus a monthly amount for expenses described Section 3(c) below during the Consulting Period for Consulting Services (the “Consulting Fee”), which shall be paid in accordance with the customary payroll practices of the Company. During the initial nine month period, Mr. Palko shall be paid such Consulting Fee regardless of the Company’s early termination of this Agreement, unless such termination is due to a breach of this Section 3 due to Mr. Palko. Any Consulting Fee payment payable to Mr. Palko hereunder in respect of any calendar month during which the Consulting Period ends prior to the end of such calendar month shall be prorated based on the ratio of the number of days in such calendar month during which Mr. Palko is retained as a consultant hereunder to the number of days in such calendar month.

(c) Mr. Palko shall receive $10,000 per calendar month as part of the Consulting Fee during the Consulting Period for the purposes of (i) the use of office space and office equipment, and (ii) expenses incurred by Mr. Palko in rendering the Consulting Services during the Consulting Period, which shall include without limitation travel, lodging, meals, and car rentals or taxi fares when out of town, long distance telephone calls to or for the Company, facsimile transmissions charges, and mailing expenses incurred by Mr. Palko in rendering the Consulting Services.

(d) Notwithstanding anything in this Agreement to the contrary, Mr. Palko shall be an independent contractor in performing the Consulting Services, with authority to select the means and method of performing the Consulting Services. Mr. Palko shall not be an employee or agent of the Company, and any action taken by Mr. Palko that is not authorized by this Agreement or any other agreement between the Company and Mr. Palko shall not bind or create any claim against the Company. Unless otherwise specifically authorized by this Agreement or any other agreement between the Company and Mr. Palko, Mr. Palko has no authority to transact any business or make any representations or promises in the name of the Company.

(e) Notwithstanding anything in this Agreement to the contrary, the consulting arrangement created by this Section 3 between the Company and Mr. Palko (i) may be terminated prior to the expiration of the Consulting Period by either party for any reason or no

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reason at all; (ii) shall terminate automatically upon the death of Mr. Palko; and (iii) shall terminate automatically at the expiration of the Consulting Period. Termination of the consulting arrangement by either party shall be evidenced by a written notice given to the other party in accordance with Section 19, which notice shall specify the termination date (which date shall not be less than 15 days after such notice is given). Upon a termination of the consulting arrangement, neither of the parties hereto shall have any further duty or obligation under this Section 3; provided, however, that termination of the consulting arrangement shall not affect the duties and obligations set forth in the other sections of this Agreement.

4. Restriction on Activities.

(a) During the Restricted Period, neither Mr. Palko nor any member of the Restricted Group shall, without the prior written consent of the Company, directly or indirectly:

(i) engage in, carry on or assist, individually or as a principal, owner, officer, director, employee, shareholder, promoter, consultant, contractor, partner, member, joint venturer, agent, owner of an Equity Interest, lender or in any other capacity whatsoever, directly or indirectly, any (A) Competing Business or (B) Business Enterprise that is otherwise directly competitive with any Affiliated Entities on or with respect to the Territory and which derives more than 5% of its revenues from or has more than 5% of its book value in assets located in the Territory;

(ii) perform for any Business Enterprise engaged in a Competing Business any duty Mr. Palko performed for the Affiliated Entities that involved such member’s access to, or knowledge or application of, Confidential Information;

(iii) advise, request, induce or attempt to induce any customer, supplier, licensee or other business relation of the Affiliated Entities to curtail, limit or cease doing business with the Affiliated Entities, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Affiliated Entities;

(iv) other than for the benefit of the Company pursuant to Mr. Palko’s consulting arrangement with the Company set forth in Section 3, individually or as a principal, owner, officer, director, employee, shareholder, promoter, consultant, contractor, partner, member, joint venturer, agent, owner of an Equity Interest of more than 2% of (or more than 10% of, as the result of any holdings in a mutual fund, hedge fund or any other similar fund over which Mr. Palko does not directly or indirectly control the investments thereof), or in any other capacity whatsoever with or in, any Business Enterprise, own, acquire, attempt to acquire or solicit the acquisition of (or assist any person or Business Enterprise to own, acquire, attempt to acquire or solicit the acquisition of) (A) any Oil and Gas Interest on or with respect to the Territory, or (B) any Equity Interest in any Business Enterprise with any Oil and Gas Interests on or with respect to the Territory and which derives more than 5% of its revenues from or has more than 5% of its book value in assets located in the Territory;

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(v) hire, attempt to hire or contact or solicit with respect to hiring (A) any Person who is an employee of the Affiliated Entities, or (B) any Person who was an employee of the Affiliated Entities within 180 days after such Person ceased to be so employed, excluding, however, any immediate family member of Mr. Palko or Mr. Palko’s administrative assistant; or

(vi) interfere with any of the Company Oil and Gas Interests or in any way attempt to do any of the foregoing or assist any other Person to do or attempt to do any of the foregoing.

(b) Mr. Palko, individually and on behalf of the Restricted Group, acknowledges that each of the covenants of Sections 4(a)(i) through 4(a)(vi) are in addition to, and shall not be construed as a limitation upon, any other covenant provided in Section 4(a). Mr. Palko, individually and on behalf of the Restricted Group, agrees that the geographic boundaries, scope of prohibited activities and time duration of each of the covenants set forth in Sections 4(a)(i) through 4(a)(vi) are reasonable in nature and are no broader than are necessary to protect the Confidential Information of the Affiliated Entities and other legitimate business interests of the Affiliated Entities, including without limitation any goodwill developed by Mr. Palko with the Affiliated Entities’ customers, suppliers, licensees, business partners and employees.

(c) The parties hereto intend that the covenants containe