RETIREMENT, SEVERANCE AND TERMINATION
                             OF EMPLOYMENT AGREEMENT

         THIS RETIREMENT,  SEVERANCE AND TERMINATION OF EMPLOYMENT  AGREEMENT is
between Pease Oil and Gas Company,  a Nevada  corporation  ("Company") and J. N.
"Newt" Burkhalter  ("Employee"),  shall be effective January 1, 1998 and is made
with reference to the following agreed facts.

         A. Employee has been employed as a full time  executive  officer of the
Company  pursuant to an Employment  Agreement dated as of December 27, 1994 (the
"Employment Agreement").

         B.  Pursuant  to a change in the  business  of the Company and the fact
Employee  has  reached  the age of 62,  the,  Employee  shall  retire and not be
employed by the Company after December 31, 1997.

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

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

         1. Retirement and Cessation of Employment.  The Employee shall continue
to be employed as a full time employee and as an Executive Vice President of the
Company through December 31, 1997. Since the Employee has reached the age of 62,
on January 1, 1998,  the Employee will retire from the Company and shall tender,
in writing, his resignation as an officer of the Company and its subsidiaries.

         2. Severance  Compensation.  Commencing January 1998, the Employee,  or
his assignee,  will be  compensated  at a rate of $4,500 per month for the first
twelve (12) months and $3,785 for the next  twenty (20)  months,  for a total of
$129,700  dollars,  unless this  Agreement is previously  terminated  due to the
death.  Each  monthly  payment  will be  tendered by the Company on or about the
tenth of each  month.  Upon the death of the  Employee,  at the end of the month
next following such event,  the Company shall pay to the estate of the Employee,
an  amount  equal  to the  difference  between  $82,500  and the  gross  amounts
previously paid to Employee pursuant to this paragraph 2 of this Agreement.

         3. Options. The stock purchase options previously granted and currently
held by the Employee, as identified on Exhibit A, shall each retain the original
terms in accordance  with  applicable  provisions of the Company's  Stock Option
Plans.

         4. Transfer of Assets.  Effective at the time of cessation of full time
employment,  the Company  shall  transfer  to the  Employee  the Company  assets
described on Exhibit B. Employee  acknowledges  that the Company shall treat the
estimated  fair market  value of the assets as 1997 income to Employee and shall
so notify taxing authorities.

         5. Special Training. At a time selected by the Employee,  but not later
than July 1, 1998,  the Company  shall pay up to $2,500 in tuition and  expenses
necessary  for  Employee to attend the M.M.S.'  basic course on oil and gas well
completion and workover or similar course.


                                                         1

<PAGE>



         6. Use of Office Space.  The Company shall make  reasonable  efforts to
provide  Employee  office space at the offices of the Company for so long as the
Company has extra space not being used for other Company business purposes.  The
space  provided  may or may not consist of the space that  Employee is currently
occupying and the Company is under no obligation to provide  office space should
its business  requirements change.  Employee may use such offices for conducting
Company  business or other  unrelated  business  and shall at all times  conduct
himself in a manner  consistent  with the best  interests of the Company and the
other  employees.  The Employee shall install and pay for his own phone line and
reimburse the Company for ancillary uses of existing  office  equipment owned by
the Company (e.g., copier, phone, facsimile, etc.).

         7. Future Consulting Services.  During the term of this Agreement,  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  consulting  services shall be performed in accordance  with one or
more separate consulting  agreements which may be entered into from time to time
in the future.

         8. Service as a Director.  The parties  acknowledge that until November
7, 1997, Employee served as a director of the Company and its subsidiaries,  and
that Employee resigned as a director, on his own volition,  effective that date.
By signing  this  Agreement,  the  Company  and the  Employee  confirm  that the
resignation by the Employee was not a condition of, nor  conditional  upon, this
Agreement.

         9.   Termination  of  Prior  Employment   Agreement.   The  rights  and
obligations of the parties as set forth in the Employment  Agreement  hereby are
terminated  and shall be of no further  effect  and,  other than as set forth in
this Agreement,  the Company shall have no other  obligations  whatsoever to the
Employee.  Employee  hereby  waives and releases any  obligation  by the Company
under  the  Employment  Agreement  and any other  claims  which  Employee  might
otherwise  assert against the Company or its officers or directors except as set
forth in this Agreement.

         10. 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 my employment
by the Company including the termination thereof, based in whole or in part upon
any act or omission  concerning  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

                                        2

<PAGE>



Act,  the Equal Pay Act,  and the  Colorado  Civil  Rights Act,  excepting  only
retirement benefits described herein,  COBRA rights,  unemployment  compensation
and  worker's  compensation.  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.  This  release  shall be governed by and  construed in
accordance  with the laws of  Colorado.  In the event of any dispute  under this
release,  the  prevailing  party  shall be  entitled  to  recover  all costs and
reasonable attorneys' fees incurred in connection therewith.

         11. 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.  If the
parties to this  agreement  cannot  agree on the choice of a single  arbitrator,
then the panel  shall  consist of three  arbitrators,  one to be selected by the
Company, one to be selected by the Employee, and the third to be selected by the
other two arbitrators.  The arbitrator(s)  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 the Agreement.

         12. 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 31, 1997,
to become effective January 1, 1998.


                                        PEASE OIL AND GAS COMPANY


                                        By /s/ Willard H. Pease, Jr.
                                          ------------------------------------
                                           Willard H. Pease, Jr., President
EMPLOYEE:

/s/ J. N. Burkhalter
-----------------------------------------
J. N. "Newt" Burkhalter



WITNESSED:


By /s/ Patrick J.  Duncan
   ---------------------------------------
   Patrick J.  Duncan, Corporate Secretary

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<PAGE>



                                    EXHIBIT A



                   Option
  Options         Exercise                               Expiration
Outstanding         Price        Grant Date              of Option
------------        -------       ------------            ----------
 48,000             0.83         May 16, 1995           May 15, 2000
 40,000             0.70         June 16, 1995          June 25, 2000
 27,000             1.00         March 9, 1996          March 8, 2001
 35,000             2.97         January 27, 1997       January 26, 2002
 -------
 150,000


                                                         4

<PAGE>


                                    EXHIBIT B



                                                            Asset
Description                                    Quantity     Number       Agreed
------------                                    --------     ------       ------
Compaq 486/33 Computer                            1         10009    $      400
Compaq SVGA Monitor                               1         10047           150
Epson LQ-1070+Dot Matrix Printer                  1         10062           100
1991 Ford F150 4WD SuperCab XLT lariat P/U
     VIN #1FTEX14H9MKA46203                                 13001         3,500
Butcher Block Desk                                1         20006           500
Butcher Block Credenza                            1         20007           250
2 Drawer Wood File Cabinet                        1         20014           100
2 Drawer Wood File Cabinet                        1         20015           100
2 Drawer Wood File Cabinet                        1         20016           100
2 Drawer Metal File Cabinet                       1         20019            50
Butcher Block Credenza                            1         20020           100
3 Drawer Lateral Wooden File Cabinet              1         20183           100
Office Chairs w/Purple Upholstery                 2           NA            100
Reclining Office Chair                            1           NA            100
Butcher Block Book Case                           2           NA            100
Walnut Colored Wooden Book Case                   1           NA            100
                                                                     -----------
                                                                     $    5,850


                                        5