SEVERANCE AND TERMINATION OF EMPLOYMENT AGREEMENT



     THIS SEVERANCE AND TERMINATION OF EMPLOYMENT AGREEMENT is between Pease Oil
and Gas Company,  a Nevada  corporation  ("Company")  and Willard H. Pease,  Jr.
("Employee"),  shall be effective  December 7, 1998 ("Effective  Date"),  and is
made with reference to the following agreed facts.


         A.  Employee has been  employed as a full time  employee of the Company
pursuant to an Amended  Employment  Agreement  dated as of November 1, 1998 (the
"Amended Employment Agreement").

         B.  Pursuant to a change in the business of the  Company,  the Employee
shall not be employed by the Company after December 7, 1998.

         C. The parties  desire and intend to set forth the terms upon which the
employment under the Amended Employment Agreement shall be terminated.


         FOR  CONSIDERATION,  the  receipt  and  sufficiency  of which is hereby
acknowledged, the Company and Employee agree as follows:


     1. Termination of Employment. The Employee shall cease to be an Employee of
the Company as of the close of business on the Effective Date.

     2.  Severance  Compensation.  As set forth in  Section  3.2 of the  Amended
Employment Agreement, upon termination,  the Company shall be obligated to pay a
total of $140,000 (the "Severance  Compensation")  to the Employee which payment
shall be made on or before  December 17, 1999.  Employee  shall also be paid the
bi-weekly compensation,  at the same rate as was paid while an employee, for the
period  ending  December  31, 1998.  At the time the Company pays the  Severance
Compensation,  the company  shall also pay to Employee an amount  equal to three
weeks compensation at the rate in effect prior to the Effective Date, as payment
for Employee's unused vacation time. All required  withholding and similar taxes
or deductions  shall be withheld from the Severance  Compensation  and the other
payments described in the preceding two sentences.

     3. Options.  All outstanding stock purchase options  previously  granted to
Employee under Company  employee  option plans shall be deemed to be terminated,
and in replacement thereof, Employee shall be granted the following nonqualified
stock purchase warrants, each of which shall expire if not previously exercised,
on December 31, 2000:

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                                                                Exercise Price
Warrants                                                              Per Share
 9,960 .....................................................          $ 8.30
 4,000 .....................................................          $ 7.00
   890 ....................................................           $10.00
 5,000 .....................................................          $29.70
10,000 ......................................................         $ 5.00
10,000 ......................................................         $27.50
39,850 Total Warrants

The form of,  and  terms  governing,  these  warrants  shall be as set  forth in
Exhibit A attached hereto and incorporated herein by reference.

         4.  Option  To  Purchase  Automobile.  Until  the  date  the  Severance
Compensation  is paid, the Employee shall have the right to purchase,  for cash,
the 1994 Suburban  automobile (vin No:  1GKFK16K6RJ755362)  from the Company for
$8,000, its agreed value as of the Effective Date. If the Employee elects not to
purchase the automobile, he shall surrender the automobile to the Company in its
present  condition at its Corporate Office on or before the close of Business on
December 17, 1998.

           If Employee elects to purchase the automobile, he shall, on or before
December 17,  1998,  obtain his own  liability  and  property  damage  insurance
coverage for the vehicle in adequate  amounts and shall cause the  automobile to
be re-licensed in his name when payment is made. The Company shall deliver title
and other  appropriate  indicia of ownership  once the automobile is fully paid.
The purchase  price for the  automobile  may be netted against the amount of the
Severance Compensation described above, at Employee's election.

         5. Future  Consulting  Services.  For a period of nine months following
the date of termination,  the Employee  agrees to be available,  on a reasonable
and mutually  agreeable  basis, to perform  consulting  services on an as-needed
basis for the Company or affiliates of the Company.  It is  specifically  agreed
that there is no  obligation  in this  Agreement  for the  Company to retain the
Employee on a consulting basis and any such future consulting  services shall be
performed  as an  independent  contractor.  In the  event the  Company  uses the
Employee as a consultant,  the Company shall pay for such services on a day rate
basis equal to the lessor of $60.00 per hour or $480 per day. Any payments  made
to Employee as a consultant shall not affect the obligations otherwise stated in
this Agreement.


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         6.  Termination  of Amended  Employment  Agreement.  With the  specific
exception of Article 4 of the Amended Employment Agreement, which shall continue
to bind the Employee in its entirety  after the Effective  date of  termination,
all other  rights and  obligations  of the  parties as set forth in the  Amended
Employment Agreement hereby are terminated and shall be of no further effect and
shall be replaced by the obligations of the parties set forth in this Agreement.
Other  than as set forth in this  Agreement,  the  Company  shall  have no other
obligations whatsoever to the Employee.

         7. Binding  Arbitration.  Any controversy arising out of or relating to
this Agreement or any modification or extension of this Agreement, including any
claim for damages and/or rescission,  shall be settled by binding arbitration in
Grand Junction,  Colorado in accordance with the Commercial Arbitration rules of
the  American  Arbitration  Association  before a panel of one  arbitrator.  The
arbitrator  sitting  in any  such  controversy  shall  have no power to alter or
modify any express  provisions  of the Agreement or to render any award which by
its terms  effects any such  alteration,  or  modification.  This section  shall
survive the termination of this Agreement.

         8. General Release.  Employee,  on his own behalf, and on behalf of his
heirs  and  assigns,  hereby  fully and  forever  unconditionally  releases  and
discharges  the  Company,  all of  its  past  and  present  parent,  subsidiary,
affiliated and related corporations, their predecessors, successors and assigns,
together with their divisions and departments, and all past or present officers,
directors,  employees,  insurers and agents of any of them (hereinafter referred
to collectively as "Releasees"),  of and from and covenants not to sue or assert
against  Releasees,  for any  purpose,  all claims,  administrative  complaints,
demands,  actions  and  causes of action,  of every kind and nature  whatsoever,
whether at law or in equity,  arising  from or in any way related to  Employee's
employment by the Company,  including the termination thereof, based in whole or
in part upon any act or omission occurring on or before the date of this general
release, whether negligent or intentional,  without regard to Employee's present
actual  knowledge of the act or omission,  which Employee may now have, or which
Employee,  or any person  acting on his  behalf  may at any future  time have or
claim to have,  including  specifically,  but not by way of  limitation,  unpaid
wages, unpaid benefits, matters which may arise at common law, such as breach of
contract, express or implied, promissory estoppel, wrongful discharge,  tortious
interference  with  contractual   rights,   infliction  of  emotional  distress,
defamation,  or  under  federal,  state or local  laws,  such as the Fair  Labor
Standards Act, the Employee  Retirement  Income Security Act, the National Labor
Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination
in  Employment  Act,  the   Rehabilitation  Act  of  1973,  the  Americans  with
Disabilities  Act, the Family and Medical  Leave Act, the  Pregnancy  Disability
Act,  the Equal Pay Act, and the Colorado  Civil Rights Act.  Employee  warrants
that he has not  assigned or  transferred  any right or claim  described in this
general  release.  Employee  expressly  assumes  all risk that the facts and law
concerning  this  general  release  may be  other  than as  presently  known  to
Employee,  and acknowledges  that, in signing this general release,  Employee is
not  relying on any  information  provided by  Releasees  or upon  Releasees  to
provide  information not known to Employee.  Employee  acknowledges  that he has
been  advised to consult an attorney  regarding  this  release,  and that he has
consulted  an  attorney.  This  release  shall be governed by and  construed  in
accordance with the laws of Colorado. In the event of any dispute

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under this release,  the prevailing party shall be entitled to recover all costs
and reasonable attorneys' fees incurred in connection therewith.

         The Company  releases the Employee of and from and covenants not to sue
or  assert  against  Employee,  for  any  purpose,  all  claims,  administrative
complaints,  demands,  actions  and  causes of action of every  kind and  nature
whatsoever, whether at law or in equity, arising from, or in any way related to,
Employee's employment by the Company,  based in whole or in part upon any act or
omission occurring on or before the date of this Agreement, whether negligent or
intentional,  which the  Company  may now have,  or which the Company may at any
future time have or claim to have,  for actions prior to the  Effective  Date of
which the Board of  Directors  was  specifically  aware on the  Effective  Date,
provided  that this release of the  Employee  shall not apply to any claim under
federal or state  securities or corporate laws,  which are against  officers and
directors of the Corporation, including Employee.

         Notwithstanding   the  above,   the  Employee   shall  be  entitled  to
contribution or indemnity for third party claims to the same extent as any other
person who served as an officer or Director of the Company  immediately prior to
the Effective Date.

         9. Resignation as Director.  Employee shall hereby resign as a director
of the Company as of the  Effective  Date,  and Employee  shall sign all written
Consents of Directors  recording  decisions of the Board of Directors made while
Employee  served as a Director.  Should  Employee  refuse or be  unavailable  to
formally  sign any such Written  Consent,  the Company may deem the Signature of
Employee on this Agreement to be his signature on any Consent

         10. Transfer of Assets.  On the Effective Date of this  agreement,  the
Company  shall  transfer to the Employee the Assets  described in a letter dated
November  1,  1998.  Employee  acknowledges  that the  Company  shall  treat the
estimated  fair value of the  assets as 1998  income to the  Employee  and shall
notify the appropriate taxing  authorities.  It is mutually agreed that the fair
value of the assets  transferred  is $500.  Employee  shall be  responsible  for
removing  these  assets,  as well the personal  assets listed in the November 1,
1998 letter, from the Company's office facility at his own expense.

         11.  Confidentiality.  The  Employee  acknowledges  that the Company is
pursuing various strategic alternatives,  including the possibility of merger or
recapitalization.  The Employee  specifically agrees not to interfere,  comment,
discuss or otherwise  disclose  such matters or any  information  related to the
Company's activities, past or present, to any individual or entity other than an
officer or director of the Company,  unless it has been  expressly  agreed to in
writing by the Company or required by law. Further, the Employee and the Company
mutually agree that they will not in the future make any disparaging  statements
concerning the other or their respective  business.  The terms of this Agreement
shall remain strictly confidential;  provided however, that the Employee and the
Company may disclose such matters to members of their immediate family, bankers,
underwriters, financial advisors, accountants, attorneys and tax advisors, or as
may be required by law.

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         12. Purchase of Other Company Assets. Employee agrees than an affiliate
of Employee,  Pease Oil  Partnership,  will purchase all of the Company's right,
title and interest in and to the shut-in oil well and prospect  known as the "LU
Sheep 2 S," located in central Wyoming for a purchase price of $2,500.  Employee
shall  cause  his  affiliate  to pay the  Company  the  purchase  price for such
property on or before  December 31, 1998, at which time the Company shall assign
and transfer to the purchaser all the Company's interest in the property.  It is
specifically   agreed  that  the  transfer  of  the  property  is  made  without
representations  or  warranties  by the  Company  and that the  purchase  of the
Company's interest in the property shall be made in an "as is" condition without
any  reliance  upon  the  Company  or its  management  in  making  the  purchase
determination.

         13. Entire  Agreement.  This Agreement is the entire agreement  between
the parties and supersedes all prior  understandings  or agreements with respect
to the matters referred to herein.  This Agreement may not be altered or amended
except by a written agreement signed by the parties.

         WHEREFORE,  the parties have signed this Agreement on December __, 1998
with an Effective Date as indicated above.



PEASE OIL AND GAS COMPANY                            EMPLOYEE:


By ____________________________             __________________________________
      Patrick J. Duncan, President               Willard H. Pease, Jr.


WITNESSED:


By ____________________________
      Virginia Cherry,
      Assistant Corporate Secretary

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