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                                                                 EXHIBIT 10.16




                    [NATIONAL ENERGY GROUP, INC. LETTERHEAD]


                                  May 6, 1997



VIA HAND DELIVERY

Mr. R. Thomas Fetters, Jr.
101 Red Brick Circle
Lafayette, Louisiana  70503

Re:  Separation Agreement

Dear Mr. Fetters:

National Energy Group, Inc. (the "Company") recognizes your service to the
Company.  This letter confirms the discussions we have held concerning the
termination of your employment with the Company, and the Company's offer and
your acceptance of this proposed separation agreement (this "Separation
Agreement") on the terms set forth below.

1.       Termination of Employment.  Your employment with the Company, where
         you have been employed as a Senior Vice President, is terminated
         effective May 6, 1997 (hereinafter the "Separation Date"), at which
         time your Employment Agreement dated January 1, 1996 (the "Employment
         Agreement") shall also terminate.

2.       Salary and Benefits.  In accordance with the Company's existing
         policies, you have received, will receive, or are receiving with this
         letter the following payments and benefits pursuant to your employment
         with the Company and your participation in the Company's benefit
         plans:

         (a)     Payment of your regular base salary through May 15, 1997, less
                 all legal deductions; and

         (b)     Payment of accrued and unused vacation leave, if any, through
                 the Separation Date, less all legal deductions.
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Two


         The amounts paid in accordance with subparagraphs (a) and (b) of this
         Paragraph are gross amounts, subject to lawful deductions, including
         any deductions you have previously authorized.

         Your paid group health insurance benefits continue through May 31,
         1997.  After the  Separation Date, you are entitled at your option to
         continue your group health insurance coverage at your expense (but
         subject to the provisions of Paragraph 3 (b) below), in accordance
         with applicable law.  Please complete the COBRA election form, which
         will be furnished to you, and return it to Ms. Patti Davis-Sebastian
         at your earliest convenience, if you elect to continue such insurance
         coverage.

         Payment of any benefits to which you have vested entitlement under the
         terms of the employee benefit plans established by the Company,
         including but not limited to the Company 401(k) Plan, shall be paid to
         you in accordance with the provisions of such plans.

         The Company will settle promptly all authorized reimbursable business
         expenses, if any, when you have submitted appropriate expense reports
         along with the required receipts and documenting information.  These
         must be submitted by the close of business on or before May 31, 1997.

3.       Special Separation Benefits.  In consideration of the General Release,
         the Confidentiality of Separation Agreement and Nondisparagement
         provision, and the Agreement Regarding Solicitation of Employees and
         Consultants set forth in this Agreement, and contingent upon your
         acceptance of the terms of this Agreement, the Company offers you the
         following Special Separation Benefits, in addition to the benefits you
         will receive pursuant to Paragraph 2:

         (a)     Termination Allowance.  A termination allowance in the amount
                 of $82,500, which is equivalent to your base salary for six
                 (6) months payable concurrently with the regularly scheduled
                 pay periods of the Company in twelve (12) equal installments
                 of $6,875 through November 15, 1997; provided that the first
                 installment for payment through May 31, 1997 shall be paid
                 upon execution and delivery of this Separation Agreement.

         (b)     Extension of Health Care Benefits.  Reimbursement to you of
                 eighty-five percent (85%) of the cost of your COBRA premium
                 for group health insurance coverage for a period of six (6)
                 months up until and including November 30, 1997, if you elect
                 to continue and/or convert for that period under the Company's
                 group health insurance policy.
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Three


         (c)     Forfeiture.  In the event you accept other employment or
                 become eligible or participate in a health coverage insurance
                 plan offered by another employer, you acknowledge and agree
                 that such Special Separation Benefits shall cease and no
                 longer be an obligation of the Company.

         By execution of this Separation Agreement, you acknowledge and agree
         that for purposes of unemployment compensation benefits, the amounts
         to be paid as specified in this Paragraph constitute wages in lieu of
         notice for the period from the Separation Date through November 15,
         1997.  Accordingly, you may not be eligible to receive unemployment
         compensation benefits during this time period.

4.       Return of Property.  Whether or not you accept the terms of this
         Separation Agreement, you must return to the Company any and all items
         of its property, including without limitation, office keys, security
         access cards, computers, equipment, credit cards, forms, files,
         manuals, correspondence, business records, personnel data, lists of
         employees, salary and benefits information, work product, maps, data
         and files relating to wells, leases, partners and/or contractors,
         seismic data and files, contracts, contract information, Prospect
         information and plans for future Prospects, brochures, catalogs,
         computer tapes and diskettes, and data processing reports, and any and
         all other documents or property which you have had possession of or
         control over during the course of your employment, and which you have
         not already returned to the Company.  You agree that you will return
         such property to the Company by no later than the close of business on
         or before May 6, 1997, or as soon thereafter as is possible with
         respect to any items not then immediately available or which you later
         find in your possession.  The provisions of this Paragraph 4 do not
         prohibit the maintenance by you of copies of any non-confidential,
         non-proprietary information, such as reading files, work papers,
         calculations, flowcharts and other similar information reflecting the
         performance of your job duties and responsibilities.

5.       Use of Confidential Information.  You acknowledge and agree that,
         except for your knowledge and training to compete in the marketplace,
         all of the non-public documents and information to which you have had
         access during your employment, including but not limited to all
         information pertaining to any specific business transactions in which
         the Company or any other Released Parties (as defined in Paragraph 6
         below) were, are, or may be involved, all information concerning
         salary and benefits paid to employees of the Company or any of the
         other Released Parties, all personnel information relating in any way
         to current or former employees of the Company or any of the other
         Released Parties, all non-public information obtained in the course of
         employment pertaining to acquisitions, divestitures, wells, Prospects
         and development plans of the Company or any of the other Released
         Parties, lease holdings and lease block bid information and
         strategies, all financial
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Four


         budgetary information, all other information specified in Paragraph 4
         above, and in general, the business and operations of the Company or
         any of the other Released Parties in addition to any other work
         product, calculations, files, maps, logs, flowcharts and other related
         and/or similar information to which you had access through the
         Company, its partners or consultants (and in particular, Sandefer Oil
         and Gas Company, Robert A. Potosky and W. David Willig) are considered
         confidential and are not to be disseminated or disclosed by you to any
         other parties, except as may be required by law or judicial process.
         You further agree that in the event it appears that you will be
         compelled by law or judicial process to disclose such confidential
         information, you will notify Mr. Philip D. Devlin, General Counsel, in
         writing at 4925 Greenville Avenue, Suite 1400, Dallas, Texas, 75206,
         immediately upon your receipt of any such notice, a subpoena or other
         legal process.

6.       General Release.

         (a)     Except for the undertakings of the Company to be performed
                 hereunder and in consideration of the Special Separation
                 Benefits described above, you and your family members, heirs,
                 successors, and assigns (collectively, the "Releasing
                 Parties") hereby release, acquit, and forever discharge any
                 and all claims and demands of whatever kind or character,
                 whether vicarious, derivative, or direct, that you or they,
                 individually, collectively, or otherwise, may have or assert
                 against (i) National Energy Group, Inc. or (ii) any officer,
                 director, stockholder, fiduciary, agent, employee,
                 representative, insurer, attorney, or any successors and
                 assigns of National Energy Group, Inc. or the individuals
                 referenced in (ii) above (collectively, the "Released
                 Parties").  This Separation Agreement includes but is not
                 limited to any claim or demand based on any federal, state, or
                 local statutory or common law that applies or is asserted to
                 apply, directly or indirectly, to the formation of your
                 employment relationship, your employment relationship, or the
                 termination of your employment relationship with the Company.
                 Thus, you and the other Releasing Parties agree not to make
                 any claims or demands against the Company or any of the other
                 Released Parties such as for wrongful discharge; unlawful
                 employment discrimination; retaliation; breach of contract
                 (express or implied); breach of the duty of good faith and
                 fair dealing; violation of the public policy of the United
                 States, the State of Texas, or any other state; intentional or
                 negligent infliction of emotional distress; tortious
                 interference with contract; promissory estoppel; detrimental
                 reliance; defamation of character; duress; negligent
                 misrepresentation; intentional misrepresentation or fraud;
                 invasion of privacy; loss of consortium; assault; battery;
                 conspiracy; bad faith; negligent hiring or supervision; any
                 intentional or negligent act of personal injury; any alleged
                 act of harassment or intimidation; or any other intentional or
                 negligent tort; or any alleged violation of the Age
                 Discrimination in Employment Act of 1967; Title VII of the
                 Civil Rights Act of 1964; the Americans with Disabilities Act
                 of 1990; the Employee Retirement Income Security Act of 1974;
                 the Fair Labor Standards Act; the Fair Credit Reporting Act;
                 the Texas Commission on Human Rights Act; or the Texas Wage
                 Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155.
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Five


         (b)     Except for your undertakings to be performed hereunder, the
                 Company and the other Released Parties hereby release, acquit,
                 and forever discharge any and all claims and demands of
                 whatever kind or character, whether vicarious, derivative, or
                 direct, that it or they, individually, collectively, or
                 otherwise may have or assert against you or any of the other
                 Releasing Parties.  This Separation Agreement includes, but is
                 not limited to, any claim or demand based on any federal,
                 state, or local statutory or common law that applies or is
                 asserted to apply, directly or indirectly, to the formation of
                 your employment relationship, your employment, or the
                 termination of your employment relationship with the Company.

         (c)     Except as otherwise provided herein, the effect of the
                 Severance Agreement is to mutually release, acquit, and
                 forever discharge any and all claims and demands of whatever
                 kind or character, that either party, the Releasing Parties,
                 or the Released Parties may now have, or hereafter have or
                 assert against each other arising out of the employment
                 relationship (including the formation and termination thereof)
                 which has existed between you and the Company.  This mutual
                 general release does not include:  (i) the executory
                 obligations of either party yet to be performed, or (ii) any
                 rights, claims or obligations which may accrue as between the
                 parties after the date of this Separation Agreement.

7.       Confidentiality of this Separation Agreement and Nondisparagement.  In
         consideration of the Special Separation Benefits described above, you
         agree that the terms of this Separation Agreement shall be and remain
         confidential, and shall not be disclosed by you to any party other
         than your spouse, attorney, accountant or tax return preparer;
         provided such persons have agreed to keep such information
         confidential, and except as may be required by law or judicial
         process.  You further agree, except as requested by the Company or as
         compelled by law or judicial process, not to cooperate or supply
         information of any kind in any proceeding, investigation, or inquiring
         raising issues under the Age Discrimination in Employment Act of 1967,
         Title VII of the Civil Rights Act of 1964, the Americans with
         Disabilities Act of 1990, the Employee Retirement Income Security Act
         of 1974, the Fair Labor Standards Act, the Fair Credit Reporting Act,
         the Texas Commission on Human Rights Act, ro the Texas Wage Payment
         Statute, Tex. Rev. Civ. Stat. Ann. art. 5155, or any other federal,
         state, or local law, involving the formation of your employment
         relationship, your employment relationship, the termination of your
         employment relationship, or the employment of other persons by the
         Company or any of the Released Parties.
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Six


         You further agree not to make any statement, oral or written, which
         directly or indirectly impugns the quality or integrity of the
         Company's or any of the other Released Parties' business practices, or
         to make any other disparaging or derogatory remarks about the Company
         or any of the other Released Parties, their officers, directors,
         stockholders, managerial personnel, or other employees or their
         partners and consultants to any other parties.  You further agree and
         acknowledge that should you breach this obligation, in addition to any
         other remedy the Company may have at law or in equity, you may be
         required to repay the Special Separation Benefits provided to you by
         this Separation Agreement, but all other provisions of this Separation
         Agreement shall remain in full force and effect.

         In consideration of the General Release, the Confidentiality of
         Separation Agreement and Nondisparagement provision, and the Agreement
         Regarding Solicitation of Employees and Consultants, set forth herein,
         the Company agrees that is shall instruct its officers, directors,
         managerial personnel, or other employees not to make any disparaging
         or derogatory remarks about you.

8.       Agreement Regarding Solicitation of Employees.  In consideration of
         the monetary payments and other benefits provided to you or on your
         behalf by the Company in this Separation Agreement, you acknowledge
         and agree that for a period of two (2) years following the termination
         of your employment with the Company, you will not, directly or
         indirectly, for your own account or for the benefit of any other
         person or party, solicit, induce, entice, or attempt to entice any
         employee, or independent contractor of the Company to terminate his or
         her employment relationship, agreements or contracts with the Company.
         You acknowledge and agree that the Company has an exclusive agreement
         with Sandefer Oil and Gas Company et al. dated January 1, 1996 (the
         "SOG Agreement") as amended April 15, 1997, and that the provisions of
         this Paragraph 8 shall specifically apply to the SOG Agreement and the
         services of Mr. Robert A. Potosky and Mr. W. David Willig.

9.       Nonadmission of Liability and Wrongdoing.  It is acknowledged that
         this Separation Agreement does not in any manner constitute an
         admission of liability or wrongdoing on the part of the Executive and
         the other Released Parties, but that Executive and the other Released
         Parties expressly deny any such liability or wrongdoing, and enter
         into this Separation Agreement for the sole purpose of avoiding
         further trouble and expense; and that, except to the extent necessary
         to enforce this Separation Agreement, neither this Separation
         Agreement, nor any part of it may be construed, used, or admitted into
         evidence in any judicial, administrative, or arbitral proceedings as
         an admission of any kind by the Company or any of the other Released
         Parties.
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Mr. R. Thomas Fetters, Jr.
May 6, 1997
Page Seven


10.      Authority to Execute.  You represent and warrant that you have the
         authority to execute this Separation Agreement on behalf of all the
         Releasing Parties.  You further agree to indemnify fully and hold
         harmless the Company and any of the other Released Parties from any
         and all claims brought by the Releasing Parties or derivative of your
         own, including the amount of any such claims the Company or any of the
         other Released Parties are compelled to pay, and the costs and
         attorney's fees incurred in defending against all such claims.

11.      GOVERNING LAW AND INTERPRETATION.  THIS SEPARATION AGREEMENT AND THE
         RIGHTS AND DUTIES OF THE PARTIES UNDER IT SHALL BE GOVERNED BY AND
         CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.  If any
         provision of this Separation Agreement is held to be unenforceable,
         such provision shall be considered separate, distinct, and severable
         from the other remaining provisions and shall not affect the validity
         or enforceability of such other remaining provisions, and that, in all
         other respects, this Separation Agreement shall remain in full force
         and effect.  If any provision of this Separation Agreement is held to
         be unenforceable as written by may be made to be enforceable by
         limitation thereof, then such provision shall be enforceable to the
         maximum extent permitted by applicable law.   The language of all
         parts of this Separation Agreement shall in all cases be construed as
         a whole, according to its fair meaning, and not strictly for or
         against any of the parties.

12.      Expiration of Offer.  The Company's offer of the proposed Special
         Separation Benefits will expire at midnight on the tenth day (the
         "Expiration of Offer") following the date of this correspondence,
         i.e., on May 16, 1997.  You may accept this offer at any time before
         the Expiration of Offer by executing this Separation Agreement and
         returning it to the designated representative of the Company.  Whether
         or not you execute this Separation Agreement, you will receive the
         items set forth in Paragraph 2 (a) and (b) and are required to follow
         the obligations set forth in Paragraphs 4 and 5 hereof.

13.      The Effective Date.  This Separation Agreement will become effective
         and enforceable seven (7) days after your execution hereof (the
         "Effective Date").  At any time before the Effective Date, you may
         revoke your acceptance.  You further agree to execute and deliver to
         the Company within seven (7) days of the execution of this Separation
         Agreement, the Reaffirmation of this Separation Agreement, attached
         hereto as Exhibit "A".

14.      Consultation With Counsel.  You have the right to consult, and are
         encouraged to consult, an attorney before executing this Separation
         Agreement.
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Mr. R. Thomas Fetters,  Jr.
May 6, 1997
Page Eight


15.      Voluntary Agreement.  You acknowledge that execution of this
         Separation Agreement is knowing and voluntary on your part, that you
         have had reasonable time to deliberate regarding its terms, and that
         you have had the right to consult with an attorney if you so desire.

16.      Entire Agreement.  This Separation Agreement contains and constitutes
         the entire understanding and agreement between you and the Company and
         may be modified only by a writing of contemporaneous or subsequent
         date executed by both you and an authorized officer of the Company.

If you are in agreement with the foregoing provisions, please execute the
attached duplicate copy of this letter in the space provided below.  This
Separation Agreement shall then constitute a valid and binding agreement by and
between the Company and you, effective as of seven (7) days after the date of
your execution hereof and delivery to the Company.

Sincerely,

National Energy Group, Inc.         ACCEPTED AND AGREED THIS
                                    13TH DAY OF MAY, 1997.

                               
By: /s/ MILES D. BENDER              /s/ R. THOMAS FETTERS, JR.
   ----------------------------     --------------------------------------
Name: Miles D. Bender               Name: Mr. R. Thomas Fetters, Jr.,
Title:   President and CEO          an Individual