May 20, 1998


VIA FACSIMILE

Mr. Willard Pease, Jr.
President
Pease Oil & Gas Company
751 Horizon Court, Suite 203
Grand Junction, CO 81506-8758

         Re:      - Letter Agreement
                  - Termination of Letter Agreements Dated
                     February 4, 1997 and January 16, 1998

Dear Mr. Pease:

         Pursuant to our telephone conversation today, this correspondence shall
act to express  the mutual  understanding  and intent of Pease Oil & Gas Company
("Pease")  and  National  Energy  Group,  Inc.  ("NEG")  with respect to (i) the
purchase and sale of 100% of Pease's right, title and interest in and to certain
Prospects as more particularly  described on Exhibit "A",  attached hereto,  and
any  data,  including  seismic  data  relating  thereto  (the  "Assets"),   (ii)
termination  of that  certain  Prospect  Participation  Letter  Agreement by and
between  Pease and NEG  dated  February  4,  1997,  as  amended  (the  "Prospect
Participation Agreement"), (iii) the amendment of that certain 3D Seismic Survey
Participation  Agreement  dated  January  16, 1998 (the  "Seismic  Participation
Agreement")  and (iv) an  alternate  unit well to be  proposed by NEG within the
existing unit of the Schwing No. 1 and/or Schwing No. 2 well located in the East
Bayou Sorrel Prospect.

1.       Purchase and Sale of the Assets; Termination of
         the Prospect Participation and Amendment
         of the Seismic Participation Agreement               

                  (a)  As of  the  Effective  Date  (hereinafter  defined),  the
         Prospect Participation  Agreement shall terminate and Pease shall sell,
         transfer,  convey and assign to NEG as may be necessary  all of Pease's
         right,  title and interest in and to those certain Prospects  described
         on  Exhibit  "A" and any  data,  including  any  seismic  data,  in the
         possession  or within the control of Pease  related  thereto.  With the
         termination  of  the  Prospect   Agreement,   all  obligations   and/or
         liabilities   related   thereto  as  between  the   parties   shall  be
         extinguished and of no further effect,  except as provided in Paragraph
         5 hereof.

                  (b)  As of  the  Effective  Date,  the  Seismic  Participation
         Agreement  shall be amended to delete the Assets and to limit the terms
         to apply solely to Pease's  interest in the East Bayou Sorrel Prospect,
         more particularly  described in that certain Operating  Agreement among
         W&T Offshore,  Inc.,  NEG,  Pease,  et al. dated December 15, 1995 (the
         "JOA") incorporated  herein by reference herein;  provided that nothing
         contained herein shall act to terminate Pease's continued participation
         within the East Bayou Sorrel Prospect.

2.       Non-Consent Waiver.

         Pease  specifically  agrees  that with  respect to Article VI B. of the
JOA, Subsequent Operations,  Pease shall not elect to invoke its right to become
a  Non-Consenting  Party (as defined therein) as to the next alternate unit well
proposed by NEG within the existing well units of the


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Schwing No. 1 well or Schwing No. 2 well located in the Contract Area described
in the JOA.

3.       Purchase Price; Effective Date.

         Each of Pease and NEG, respectively,  agree to the sale and purchase of
the Assets at a purchase price equal to $750,000.00 less any and all outstanding
obligations  owed by Pease to NEG as of April 30, 1998 (the  "Effective  Date"),
including but not limited to, obligations pursuant to the Prospect Participation
Agreement and/or the Seismic Participation Agreement (the "Purchase Price"). NEG
agrees to credit Pease for 100% of actual costs relating to the Assets purchased
and sold  hereunder  which  have  been  paid by Pease to NEG from and  after the
Effective  Date,  and an  accounting  summary of all  obligations  owed by Pease
and/or  credits to Pease as  described  herein  shall be delivered by NEG at the
Closing (hereinafter defined).

4.       The Closing.

         The  closing  shall occur at a mutually  agreeable  time prior to 12:00
P.M. CDT on or before May 29, 1998 (the "Closing").  At the Closing,  any amount
owed by NEG to Pease  (or  Pease to NEG as the case may be) as  provided  herein
shall be payable in immediately available funds by wire transfer.

5.       The Closing Statement; The Post-Closing Adjustment Statement.

                  (a)  NEG  estimates  the  net  obligation  of  Pease  due  NEG
         hereunder is approximately $700,000.00, and NEG agrees to provide Pease
         a Closing  Statement  detailing  such  amounts  owed on or  before  the
         closing of business on Thursday, May 21, 1998.

                  (b) Within sixty (60) days  following  the Closing,  NEG shall
         provide  Pease with a  Post-Closing  Adjustment  Statement  which shall
         account for all  obligations  and/or  credits  attributable  to Pease's
         interest in the Assets which were outstanding as of the Effective Date,
         but not paid or credited at the Closing.  The  Post-Closing  Adjustment
         Statement  shall be  conclusively  deemed to be  accurate  and shall be
         binding  upon the  parties  hereto  with  respect to the Assets  unless
         written  notice to the  contrary is  delivered  to NEG within three (3)
         days  following  receipt  by  Pease  of  the  Post-Closing   Adjustment
         Statement;  provided that nothing contained in the Closing Statement or
         Post-Closing  Adjustment  Statement  shall  act to  supersede  or limit
         Pease's right to accounting  or audit  procedures  contained in (i) the
         JOA  pertaining  to the East Bayou  Sorrel  Prospect  or (ii) any other
         Operating  Agreement  between  NEG and  Pease  pertaining  to any wells
         drilled prior to the Effective  Date on any of the Prospects  described
         as Assets herein.

                  (c) Within five (5) days following the parties' reconciliation
         of the Post-Closing  Adjustment Statement,  the party owing any balance
         pursuant  thereto shall make payment  thereof in immediately  available
         funds by wire transfer.

6.       Relationship Following Closing; Non-Compete.

         Pease and NEG, for  themselves  and on behalf of their  successors  and
assigns,  agree to use  their  best  efforts  and  cooperate  with the  other to
consummate  the  transactions  contemplated  herein  that  each may  attain  the
benefits of its bargain  with the other.  Accordingly,  it is  acknowledged  and
agreed that, although not foreseen or contemplated as of the date hereof, either
or both at the reasonable  request of the other shall do,  execute,  acknowledge
and  deliver or cause to be  delivered  or done any such  further  acts,  deeds,
assignment,  transfers, conveyances, powers of attorney, and assurance as may be
necessary to carry out the terms and intent of this Letter Agreement (including


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cooperation  in any  litigation  with respect to the Assets brought by any party
not a party to this Letter  Agreement).  Pease further  agrees that in order for
NEG to obtain  the  benefits  provided  in this  Letter  Agreement,  it will not
directly or indirectly, for itself or on behalf of any third party, for a period
of three (3) years following the Closing  acquire any interest in lands,  leases
or seismic  data  related to the  Prospects  on Exhibit  "A" without the express
written consent of NEG;  provided that Pease's  continued  participation  in the
East  Bayou  Sorrel  Prospect  shall  not be deemed  to be a  violation  of this
"non-compete" provision.

7.       Confidentiality.

         Pease  acknowledges  and agrees that as a p arty to the JOA it has been
afforded  access to and is in  possession  of  certain  non-public  confidential
information  concerning  the Assets  (the  "Confidential  Information")  and the
dissemination of which to unauthorized  parties could result in irreparable harm
to NEG. Therefore,  Pease agrees that such Confidential Information shall not be
disclosed  to any third  party  without  the  express  written  consent  of NEG;
provided that this provision shall become  inoperative as to any such portion of
the Confidential Information which (a) becomes generally available to the public
other than as a result of a disclosure by Pease or its representatives;  (b) was
available  on a  non-confidential  basis  prior to its  disclosure;  (c)  become
available on a non-  confidential  basis from a source other than NEG when Pease
reasonably  believes  such  source is entitled  to make the  disclosure;  (d) is
developed by or for Pease independent of Confidential Information made available
by NEG; (e) is subject to disclosure  pursuant to the rules  promulgated  by the
Securities and Exchange  Commission of the United States,  the respective  stock
exchanges  upon which the parties are listed or other  regulatory  agency having
lawful jurisdiction,  or (f) in the written opinion of counsel is required to be
disclosed.  Except as  provided  for above,  the  obligation  under this  Letter
Agreement to preserve the confidentiality of the Confidential  Information shall
terminate three (3) years following the Closing.  Pease further agrees to return
to NEG at the Closing all  Confidential  Information  pertaining to the Prospect
Participation Agreement and the Seismic Participation Agreement which Pease, its
employees,   representatives   and/or  consultants  have  in  their  possession,
including any copies, notes, summaries,  analyses or other material derived from
the Confidential Information.

8.       Miscellaneous.

                  (a) This Letter  Agreement,  including the attached  Exhibits,
         contains the entire  understanding of the parties hereto and supersedes
         all prior agreements between the parties with respect to, and only with
         respect to, the subject  matter  hereof.  This Letter  Agreement may be
         amended or modified only by a written instrument duly executed by Pease
         and NEG. THE VALIDITY AND  CONSTRUCTION OF THIS LETTER  AGREEMENT SHALL
         BE GOVERNED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS.

                  (b) In the  event of a dispute  between  the  parties  to this
         Letter Agreement,  the parties agree not to file any action or petition
         in any court of law or equity for any  relief,  but to  participate  in
         good faith in a minimum of four (4) hours of mediation in Dallas, Texas
         with an  attorney-mediator  who has a  minimum  of ten  (10)  years  of
         experience in the oil and gas industry and who is trained and certified
         by the American Arbitration Association,  the United States Arbitration
         and Mediation Service, or any comparable organization,  and to abide by
         the mediation procedures and decision of such organization. The parties
         agree to  equally  bear the costs of the  mediation  and to  proceed as
         expeditiously  as allowed by the rules of such  organization  chosen to
         provide  mediation  services.  In the event the parties  cannot resolve
         their dispute through mediation as described herein,  the parties agree
         to participate in binding  arbitration and to proceed as  expeditiously
         as allowed pursuant to the


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         rules of the American  Arbitration  Association  or mutually  agreeable
         similar organization with an arbitrator or arbitrators having a minimum
         of ten  (10)  years  experience  in the  oil  and  gas  industry.  Such
         arbitration  shall  be held in  Dallas,  Texas,  shall be  binding  and
         nonappealable  and a  judgment  on the  award to the  prevailing  party
         (inclusive of reasonable  attorney's  fees and costs) may be entered in
         any court having competent jurisdiction.

         If  this   correspondence   expresses  our  mutual   understanding  and
agreement,  please  execute  and  return by  facsimile  one copy of this  Letter
Agreement to the undersigned not later than 5:00 p.m.,  CDT,  Thursday,  May 21,
1998, at which time this offer by NEG shall expire if not executed and delivered
to NEG by Pease.

                                              Very truly yours,

                                              National Energy Group, Inc.



                                               By:     /s/ C. L. Elsey 
                                                       Chuck L. Elsey
                                                Executive Vice President and
                                                Chief Operating Officer

Accepted and Agreed
this 21 day of May, 1998

Pease Oil & Gas Company

By: /s/ Willard Pease, Jr.       
       Willard Pease, jr.
       President

PDD:mjg



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                        EXHIBIT "A" attached to and made
                     a part of that certain LETTER AGREEMENT
                   by and between National Energy Group, Inc.
                          And Pease Oil and Gas Company
                               dated May 20, 1998.


                                    PROSPECTS


Prospect Name                                       Pease Participation Interest

Northwest Bayou Sorrel/Louisiana                              3/16
Berry Bayou/Louisiana                                         3/16
Southeast Gueydan/Louisiana                                   1/8
West Grand Bayou/Louisiana                                    1/8
Tiger Bayou/Louisiana                                         1/8
South Tiger Bayou/Louisiana                                   1/8
Knowles/Texas                                                 1/8
Robertsdale/Alabama                                           1/8
Mushroom/Texas                                                1/8
Nueces Offshore
    (Mustang Island Exploration)/ Texas                       1/8
Apple Springs/Texas                                           1/8
Panaco Agreement "deep rights"/Louisiana                      14.0625%