January 16, 1998


Mr. Willard Pease, Jr., President
Pease Oil and Gas Company
751 Horizon Court, Suite 203
P.O. Box 60219
Grand Junction, CO 81506-8758

         Re:      Letter Agreement
                  3D Seismic Survey Participation and
                  Amendment of Agreement dated February 4, 1997

Dear Mr. Pease:

         Pursuant to our discussions, this Letter Agreement shall act to express
the mutual  understanding  and agreement by and between  National  Energy Group,
Inc.  ("NEG")  and  Pease  Oil  and  Gas  Company   ("Pease")  with  respect  to
participation in that certain 3D seismic survey currently being conducted by NEG
over an approximate 54 square mile area located in Iberville  Parish,  Louisiana
(the "3D Survey") as more particularly described on Exhibit "A", attached hereto
and incorporated herein, and subject to the terms and conditions hereof.

         WHEREAS,  NEG and Pease are parties to that  certain  Letter  Agreement
dated February 4, 1997 pertaining to Pease's  participation in certain Prospects
of NEG (the "February 4, 1997 Agreement") incorporated by reference herein; and

         WHEREAS,  NEG is a party to that certain  agreement dated July 22, 1997
by and between NEG and  Sullivan  and Company 3D Program I, L.L.C.  ("Sullivan")
pertaining  to the 3D Survey and certain  obligations  to Sullivan in connection
therewith  (the  "Sullivan  Agreement"),  incorporated  by  reference  herein as
Exhibit "A-1"; and

         WHEREAS, NEG and Acadian Geophysical Services, Inc. are parties to that
certain  Geophysical  Services  Agreement  dated October 10, 1997  providing for
various  services  and a 3D seismic  data survey  within the 3D Survey Area (the
"Geophysical Services  Agreement"),  incorporated by reference herein as Exhibit
"A-2"; and

         WHEREAS,  NEG and Pease desire to amend certain aspects of the February
4, 1997  Agreement as more  particularly  described  below,  provide for Pease's
participation  in the 3D Survey and create an area of mutual interest within the
area encompassed by the 3D Survey (the "3D Survey Area").

         NOW THEREFORE,  in consideration of the mutual covenants and agreements
herein contained and good and valuable  consideration,  the sufficiency of which
is hereby acknowledged, the parties agree as follows:

1.   Participation.  NEG and Pease agree that Pease shall (i) have the right and
     the  obligation to  participate  in the 3D Survey with NEG as the Operator,
     (ii)  increase its  participation  and  obligation  from 1/8th  interest to
     3/16ths  interest  with  respect  to the NW Bayou  Sorrel  and Berry  Bayou
     Prospects described in the February 4, 1997 Agreement, and (iii) purchase a
     14.0625%  interest in any leases  acquired  from Panaco,  Inc. by agreement
     dated November 11, 1996 (the "Panaco  Acquisition") only as to depths below
     the L4 Sand,  the base of which is defined as  occurring  at a measured log
     depth of 11.340  feet in the NEG  Schwing #1 well  located in  2-T10S-R11E,
     Iberville Parish, Louisiana (the "L4 Sand"); provided Pease:

         1.1      shall,  upon execution and delivery of this Letter  Agreement,
                  pay an amount  equal to  $1,228,510.00,  as more  particularly
                  described on Schedule 1 hereto;

         1.2      shall pay, within fifteen (15) days of receipt of an invoice 
                  from NEG,  14.0625% of all costs relating to the 3D Survey 
                  incurred by NEG after December 31, 1997;

         1.3      shall ratify and agree to be bound by the terms and conditions
                  of the  Sullivan  Agreement  and  accept  liabilities  for its
                  14.0625% proportionate share thereof;

         1.4      shall  ratify  and  agree to be bound by all  permits,  leases
                  and/or other agreements now existing or hereafter  acquired by
                  NEG  relating  to the 3D Survey and accept  liability  for its
                  14.0625% proportionate share thereof;

         1.5      shall ratify and agree to be bound by the terms and conditions
                  of the Geophysical  Services  Agreement and accept liabilities
                  for its 14.0625% proportionate share thereof;

         1.6      shall ratify and agree to be bound by the terms and conditions
                  of any agreement and/or  amendments to the existing  Agreement
                  between NEG and Sandefer Oil & Gas Inc.  ("SOG") dated January
                  1, 1996 (the "SOG  Agreement")  and the  Consulting  Agreement
                  between SOG and Potosky Oil & Gas Inc. and Atocha Exploration,
                  Inc. dated January 1, 1996, each of which are  incorporated by
                  reference herein, which may relate to the 3D Survey and/or the
                  3D Survey Area; provided that NEG shall bear the burden of the
                  SOG Deferred  Leasehold  Interest described in Paragraph 17 of
                  the SOG Agreement;

         1.7      shall enter into a Joint  Operating  Agreement  ("JOA") on all
                  leases  owned and  Prospects  developed  within  the 3D Survey
                  Area, it being understood and agreed that such JOA shall be in
                  the form of JOA attached hereto as Exhibit "B"; and

          1.8     shall agree to amend the February 4, 1997 Agreement in 
                  accordance with the terms and conditions hereof.

2.       Interest.  Subject to the  conditions  described  in Paragraph 1 above,
         Pease shall earn and become entitled to receive from NEG an interest in
         any Prospect developed within the 3D Survey Area on a promoted basis as
         follows:

         2.1      The February 4, 1997 Agreement shall be, and hereby is amended
                  to  provide  that  Pease's  interest  in the NW  Bayou  Sorrel
                  Prospect,   Berry  Bayou  Prospect,  and  any  other  Prospect
                  developed  within the 3D Survey Area (save and except (i) that
                  portion of the Louisiana  State Lease #2102 which is or may be
                  located in the producing  units of the Schwing #1,  Schwing #2
                  and Schwing #3 wells in Iberville Parish,  Louisiana, (ii) any
                  existing  units or wells  drilled  within  the 3D Survey  Area
                  acquired from Panaco,  Inc. pursuant to the Panaco Acquisition
                  and all rights above the L4 Sand in such existing  units,  and
                  (iii) any Prospect  within the existing East Bayou Sorrel Area
                  of Mutual Interest, other than those Prospects at depths below
                  the L4 Sand included in the Panaco Acquisition and fall within
                  such  East  Bayou  Sorrel  Area of Mutual  Interest)  shall be
                  increased  to  include  a  participation   interest  equal  to
                  14.0625%  for such  Prospects;  provided  that Pease  shall be
                  obligated  to pay to NEG  18.75% of costs to casing  point for
                  the initial well in each Prospect,  18.75% of the Prospect fee
                  for each Prospect and 18.75% of all land costs  incurred prior
                  to December  31, 1997.  All land costs for each such  Prospect
                  incurred  after  December 31, 1997 and not otherwise  provided
                  for  herein  or in the  February  4, 1997  Agreement  shall be
                  billed to Pease at its  participation  interest  percentage of
                  14.0625%, and NEG and Pease agree that Pease shall forfeit all
                  right to  participate  in any  lease  acquired  within  the 3D
                  Survey Area after  December 31, 1997 for which it has not made
                  full  payment  to NEG within  fifteen  (15)  business  days of
                  receipt  of an  invoice  from  NEG  pertaining  to such  lease
                  acquisition costs; provided,  however, that Pease shall not be
                  subject to such  forfeiture  unless Pease shall have  received
                  from NEG within 48 hours of such  forfeiture a "final  notice"
                  that NEG is not in receipt of payment of such land costs.  NEG
                  agrees  that it shall  assign  to Pease its full  interest  in
                  leases  already  acquired and shall  furnish  copies of all 3D
                  Survey Area lease  acquisitions and any lease purchase reports
                  described herein on or before April 1, 1998; and

         2.2      Pease shall acquire  14.0625% of NEG's  ownership  interest in
                  and  Pease  shall  be  given  copies  of any  data  collected,
                  processed  and delivered to NEG relating to the 3D Survey (the
                  "Data") pursuant to the Geophysical  Services Agreement within
                  seven (7) days of receipt of such Data by NEG;  provided  that
                  Pease shall be prohibited  from  selling,  licensing or in any
                  manner  disseminating  the Data to any third parties which are
                  not a party to this Letter  Agreement for a period of five (5)
                  years from the date of  execution  hereof  without the express
                  written consent of NEG; provided further,  in the event either
                  party hereto shall sell or license any of the Data to any such
                  third  party,  the other party hereto shall be entitled to its
                  proportionate  share of any proceeds  derived  therefrom.  NEG
                  shall  use  its  best  efforts  to  maintain  the  Data  in  a
                  reasonably prudent manner.

3.        Acknowledgement.  Each of NEG and Pease  hereby  acknowledges  and
          agree that (i) the February 4, 1997 Agreement  shall be, and hereby is
          amended  with,  and only with,  respect to the subject  matter  hereof
          pertaining to Pease's participation in the 3D Survey and any Prospects
          generated  therefrom  described  in  Paragraph 2 hereof,  (ii) nothing
          contained   herein   shall  act  or  be   construed  to  increase  the
          participation  interest  of Pease  in any  Prospect  described  in the
          February 4, 1997  Agreement  (other  than as  provided in  Paragraph 2
          hereof) without the express  written  agreement of the parties hereto,
          and (iii) all other provisions of the February 4, 1997 Agreement shall
          remain in full force and effect in accordance with its terms.

4.        Term.  The term of this Letter  Agreement  shall be for a period of
          five (5) years from the date of execution hereof.

5.       CHOICE OF LAW. THIS LETTER  AGREEMENT,  THE LEGAL  RELATIONSHIP  OF THE
         PARTIES AND ALL RIGHTS AND  OBLIGATIONS  HEREUNDER SHALL BE GOVERNED BY
         AND INTERPRETED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE
         LAWS OF THE STATE OF TEXAS,  WITHOUT REFERENCE TO THE LAWS OF ANY OTHER
         JURISDICTION.

6.        Mediation/Arbitration.  In the  event  of a  dispute  between  the
          parties to this Letter  Agreement,  the parties  agree not to seek any
          relief  nor file any  action  in a court of law or  equity,  but shall
          participate in good faith  negotiations in mediation in Dallas,  Texas
          with a mediator  experienced in oil and gas transactions  certified by
          the American Arbitration Association or comparable  organization,  the
          costs of such mediator to be borne equally by each of the parties.  In
          the event a resolution  is not agreed,  the parties  further  agree to
          participate in binding arbitration in Dallas, Texas with arbitrator(s)
          experienced in oil and gas  transactions  pursuant to the rules of the
          American Arbitration Association or similar organization, the costs of
          which may be awarded to the  prevailing  party together with a binding
          and  nonappealable  judgment  on the award which may be entered in any
          court having competent jurisdiction.

7.       Notices.  Any notice required hereunder shall be in writing;  delivered
         to or sent by U.S. Mail,  postage  pre-paid,  or nationally  recognized
         commercial carrier service, postage or delivery charges pre-paid, or by
         telecopy  with a copy  delivered to the U.S.  Mail,  postage  pre-paid,
         addressed as follows (or such other address as may be specified by five
         (5) days prior written notice to the other party hereto):

         NEG:                                     PEASE:

         National Energy Group, Inc.              Pease Oil and Gas Company
         4925 Greenville Avenue                   751 Horizon Court, Suite 203
         Suite 1400                                           P.O. Box 60219
         Dallas, Texas 75206-4095                 Grand Junction, Colorado 81506
         Attn:    Mr. William T. Jones            Attn: Mr. Willard Pease, Jr.
                  Sr Vice President-Operations              President
         Phone: (214) 692-9211                    Phone:  (970) 245-5917
         Fax:   (214) 692-9310                    Fax:    (970) 243-8840

8.       Assignment.  This Letter Agreement shall inure to the benefit of and be
         binding upon NEG and Pease and their respective successors and assigns.

9.       Completeness.  This Letter  Agreement  supersedes  all prior written or
         oral agreements and understandings  between the parties and constitutes
         the complete  agreement between the parties with respect to the subject
         matter  hereof.  This  Letter  Agreement  cannot be modified or amended
         except by written instrument duly executed by NEG and Pease.

         If the foregoing  expresses  our mutual  understanding  and  agreement,
please so indicate by executing in the appropriate space below and returning one
(1) fully executed copy to the undersigned.
          
                                        Sincerely,


                                        William T. Jones
                                        Senior Vice President - Operations
PDD:mjg

ACCEPTED AND AGREED this
______ day of January, 1998.

Pease Oil and Gas Company

---------------------------------
By:   Willard H. Pease, Jr.
Title: President and CEO

C:\MJG\LETTERS\WillardPease,Jr.-011698