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                                                                    EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT



                  THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of April
4, 2001 (the "Effective Date") by and between THE HOUSTON EXPLORATION COMPANY, a
Delaware corporation (the "Company"), and WILLIAM G. HARGETT (the "Executive").

                                   WITNESSETH:

                  WHEREAS, the Company desires to employ the Executive upon the
terms and conditions and in the capacities set forth herein;

                  WHEREAS, the Executive is willing to perform services for and
on behalf of the Company upon the terms and conditions set forth herein;

                  NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Executive hereby agree as follows:

                  1. Employment and Term of Employment. Subject to the terms and
conditions of this Agreement, the Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company as President and Chief
Executive Officer for a term (the "Term of Employment") beginning on the
Effective Date and ending on the Expiration Date (defined below). As used in
this Agreement, "Expiration Date" means the third anniversary of the Effective
Date, provided that on the first anniversary of the Effective Date and on each
subsequent anniversary of the Effective Date (such first anniversary date and
each such subsequent anniversary date being referred to as a "Renewal Date"),
the Expiration Date, shall be automatically extended one additional year unless,
not less than 90 days prior to the relevant Renewal Date, (i) either party shall
have given written notice to the other that no such automatic extension shall
occur after the date of such notice or (ii) either party shall have given a
Notice of Termination to the other pursuant to Section 7 hereof. Notwithstanding
the foregoing, if either party gives a valid Notice of Termination pursuant to
Section 7 hereof, the Term of Employment shall not extend beyond the termination
date specified in such Notice of Termination.

                  2. Scope of Employment. (a) During the Term of Employment, the
Executive agrees to (i) serve as President and Chief Executive Officer of the
Company and shall have and may exercise all the powers, duties and functions as
are normal and customary to such positions and that are consistent with the
responsibilities set forth with respect to such positions in the Company's
by-laws and (ii) perform such other duties not inconsistent; with his position
as are assigned to him, from time to time, by the Board of Directors of the
Company (the "Board"). During the Term of Employment, the Executive shall (i)
report directly and exclusively to the Board and (ii) devote substantially all
of his business time, attention, skill and efforts to the faithful performance
of his duties hereunder. Subject to Section 6, the foregoing shall not be
construed to prevent the Executive from making investments in businesses or
enterprises so long as such investments do not require any services on the part
of the Executive in the operation of such business or enterprises of a nature or
magnitude that would interfere materially with the performance of his duties
hereunder or, with the consent of the Board, from serving on the board of
directors of other business entities, or otherwise devoting a reasonable amount
of time to industry, civic or charitable activities.



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                  (b) During the Term of Employment, all other officers of the
Company shall report directly to the Executive or, in the Executive's
discretion, to officers designated by the Executive.

                  (c) The Company agrees to use its best efforts to cause the
Executive to be elected or appointed, or re-elected or re-appointed, as a
director of the Company at all times during the Term of Employment. During the
Term of Employment, the Executive agrees to serve, if elected, as an officer or
director of any subsidiary or affiliate of the Company so long as such service
is commensurate with the Employee's duties and responsibilities to the Company.

                  (d) The Executive's place of employment hereunder shall be at
the Company's principal executive offices in the greater Houston, Texas
metropolitan area. Moreover, the Company agrees that it will provide immunity
and indemnity for the Executive to the fullest extent allowed by law, that if
necessary it will amend its certificate of incorporation and by-laws to so
provide, and that it will obtain errors and omissions insurance in the amount of
no less than $10,000,000 naming the Executive as an additional insured.

                  3. Compensation. During the Term of Employment, in
consideration of the Executive's services hereunder, including, without
limitation, service as an officer or director of the Company or of any
subsidiary or affiliate thereof, and in consideration of the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, the Executive shall receive a salary at the rate of $400,000
per year (payable at such regular intervals as other employees of the Company
are compensated in accordance with the Company's employment practices), which
amount shall be subject to review annually by the Board and may be adjusted at
its discretion, provided that such salary may not be reduced at any time. In
addition, the Executive shall be entitled to participate in such bonus,
incentive compensation or other programs as are created or approved by the Board
from time to time including, without limitation, those set forth on Exhibit A
hereto.

                  4. Additional Compensation and Benefits. (a) As additional
compensation for the Executive's services under this Agreement, the Executive's
covenants regarding confidentiality in Section 5 hereof and noncompetition in
Section 6 hereof, during the Term of Employment, the Company agrees to provide
the Executive with the non-cash benefits provided by the Company to its other
officers and key employees as they may exist from time to time. Such benefits
shall include leave or vacation time (not less than six weeks per year) medical
and dental insurance, life insurance and other health care benefits, retirement
and disability benefits as may hereafter be provided by the Company in
accordance with its policies for executive employees as well as any stock option
plan or similar employee benefit for which key executives are or shall become
eligible. The Executive's participation in each employee benefit plan or program
provided generally to officers or other senior executives of the Company in
general shall be at least as favorable to the Executive as the most highly
benefited employee thereunder.

                  (b) The Executive is authorized to incur reasonable business
expenses for promoting the business and reputation of the Company, including
(without limitation) reasonable expenditures for travel, lodging, club
memberships, meals and client, patron, customer and/or business associate
entertainment. The Company shall reimburse within 30 days the Executive for
reasonable expenses incurred by the Executive in furtherance of the Company's
business, provided that such expenses are incurred in accordance with the
Company's policies and upon presentation of documentation in accordance with
expense reimbursement policies of the Company as they may exist from time to
time, and submission to the Company of adequate documentation in accordance with
federal income tax regulations and administrative pronouncements.

                  (c) During the Term of Employment, the Company shall pay to
the Executive an automobile allowance of $700 per month. The Board shall review
the amount of such monthly allowance at least annually and may increase the same
at any time as the Board deems appropriate.



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                  (d) In the event of the sale of all or substantially all of
the assets of the Company or the acquisition by any person other than KeySpan
Corporation doing business as KeySpan Energy or its affiliates ("KeySpan") of a
majority of the outstanding common stock of the Company, the Company agrees to
award reasonable compensation to the Executive in recognition of his services
provided in consummating such transaction.

                  (e) Upon execution of this Agreement, the Executive shall be
entitled to receive 10,000 shares of Common Stock of the Company. Such stock
shall be restricted from transfer and subject to forfeiture in the event the
Executive's employment shall be terminated prior to the third anniversary of
this Agreement and otherwise shall vest, be nonforfeitable and freely
transferable in equal one-third increments on each anniversary of this
Agreement. Such stock shall also vest upon a termination of the Executive's
employment during the Term of Employment by the Executive for Good Reason
(defined in Section 7 hereof) or by the Company for any reason other than Cause
(defined in Section 7 hereof).

                  5. Confidentiality and Other Matters.

                  (a) Confidentiality. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all maps, data, reports, including
results of exploration, drilling, drill cores, cuttings, and other samples, and
other information relating to the business of the Company which comes into the
possession of the Executive during the Term of Employment (such information
being collectively referred to herein as the "Confidential Information"). During
the Term of Employment and after termination of the Executive's employment
hereunder, the Executive agrees: (i) to take all such precautions as may be
reasonably necessary to prevent the disclosure to any third party of any of the
Confidential Information; (ii) not to use for the Executive's own benefit any of
the Confidential Information; and (iii) not to aid any other person or entity in
the use of the Confidential Information in competition with the Company,
provided that nothing in this Agreement shall prohibit the Executive from
disclosing or using any Confidential Information (A) in the performance of his
duties hereunder, (B) as required by applicable law, (C) in connection with the
enforcement of his rights under this Agreement or any other agreement with the
Company, (D) in connection with the defense or settlement of any claim, suit or
action brought or threatened against the Executive by or in the right of the
Company or (E,) with the prior written consent of the Board. Notwithstanding any
provision contained herein to the contrary, the term "Confidential Information"
shall not be deemed to include any general knowledge, skills or experience
acquired by the Executive or any knowledge or information known or available to
the public in general. The Executive further agrees that, if requested by the
Company in writing at any time after termination of his employment for any
reason, he will promptly surrender to the Company all Confidential Information,
and any copies thereof, in his possession and agrees that all such materials,
and copies thereof, are at all times the property of the Company.
Notwithstanding the foregoing, the Executive shall be permitted to retain copies
of, or have access to, all such Confidential Information relating to any
disagreement, dispute or litigation (pending or threatened) involving the
Executive.

                  (b) Definitions: Remedies. For purposes of this Section 5, the
"Company" shall be defined as the Company and its affiliated companies including
(without limitation) its successors and assigns and its subsidiaries and each of
their respective successors and assigns. In the event of a breach or threatened
breach by the Executive of the provisions of this Section 5, the Company shall
be entitled to an injunction restraining the Executive from violating such
provisions without the necessity of posting a bond therefor. Nothing herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to it at law or in equity. Except as specifically set forth herein,
the parties agree that the provisions of this Section 5 shall survive the
earlier termination of the Executive's employment with the Company, as the
continuation of this covenant is necessary for the protection of the Company.



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                  6. Noncompetition

                  (a) Noncompetition Activities. The Executive acknowledges that
the nature of the employment under this Agreement is such as will bring the
Executive in personal contact with patrons or customers of the Company and will
enable him to acquire valuable information as to the nature and character of the
business of the Company, thereby enabling him, by engaging in a competing
business in his own behalf, or for another, to take advantage of such knowledge
and thereby gain an unfair advantage. Accordingly, the Executive covenants and
agrees that he will not, without the prior written consent of the Company during
the Term of Employment and for the period of one year thereafter, engage
directly or indirectly for himself, or as an agent, representative, officer,
director or employee of others, in the exploration for or production of
hydrocarbons in waters offshore from the States of Texas and Louisiana, provided
that the foregoing restriction shall not apply at any time if the Executive's
employment is terminated during the Term of Employment by the Executive for Good
Reason or by the Company for any reason other than Cause and, provided further,
that nothing in this Agreement shall prohibit the Executive from acquiring or
holding any issue of stock or securities of any entity registered under Section
12 of the Securities and Exchange Act of 1934 (as amended), listed on a national
securities exchange or quoted on the automated quotation system of the National
Association of Securities Dealers. Inc. so long as the Executive is not defined
to be an "affiliate" of such entity as such term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act of 1933 (as amended).

                  (b) Scope. In the event that the provisions of this Section 6
should ever be deemed to exceed the time, geographic or activity related
limitations permitted by applicable law, then such provisions shall be reformed
to the maximum time, geographic or activity related limitations permitted by
applicable law. In the event of a breach or threatened breach by the Executive
of the provisions of this Section 6, the Company shall be entitled to an
injunction restraining the Executive from violating such provisions without the
necessity of posting a bond therefor. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to it at law
or in equity. Except as specifically set forth herein, the parties agree that
this Section 6 shall remain in effect for its full term notwithstanding the
earlier termination of the Executive's employment with the Company, as the
continuation of this covenant is necessary for the protection of the Company.
For purposes of this Section 6, the "Company" shall be defined as the Company
and its affiliated companies, including (without limitation) its successors and
assigns and its subsidiaries and each of their respective successors and
assigns.

                  7. Termination.

                  (a) General. The Executive's employment hereunder shall
automatically terminate on the earlier of his death or the Expiration Date. The
Executive may, at any time prior to the Expiration Date, terminate his
employment hereunder for any reason by delivering a Notice of Termination
(defined below) to the Board. The Company may, at any time prior to the
Expiration Date, terminate the Executive's employment hereunder for any reason
by delivering a Notice of Termination to the Executive, provided that in no
event shall the Company be entitled to terminate the Executive's employment
prior to the Expiration Date unless the Board shall duly adopt, by the
affirmative vote of a least a majority of the entire membership of the Board, a
resolution authorizing such termination and stating whether such termination is
for Cause (defined below). The giving of a notice pursuant to clause (i) of the
proviso contained in the penultimate sentence of Section 1 hereof shall not be
deemed a termination of the Executive's employment by the party giving such
notice. As used in this Agreement, "Notice of Termination" means a notice in
writing purporting to terminate the Executive's employment in accordance with
this Section 7, which notice shall (i) specify the effective date of such
termination (not prior to the date of such notice) and (ii) in the case of a
termination by the Company for Cause or Disability or a termination by the
Executive for Good Reason or Disability, set forth in reasonable detail the
reasons for such termination and the facts and circumstances claimed to provide
a basis for such termination.

                  (b) Automatic Termination on Expiration Date. In the event the
Executive's employment hereunder shall automatically terminate on the Expiration
Date for any reason other than death, the Executive shall only be entitled to
receive (i) all unpaid compensation accrued as of' the termination date pursuant
to Section 3



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hereof, (ii) all unused vacation time accrued by the Executive as of the
termination date, (iii) all amounts owing to the Executive under Sections 4(b)
and 4(c) hereof and (iv) those benefits under Section 4 which are required under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
other laws. The amounts described in clauses (i), (ii) and (iii) of the
foregoing sentence shall be paid to the Executive in a lump sum payment promptly
after the Expiration Date.

                  (c) Termination by Company for Cause. If the Company
terminates the Executive's employment for Cause, the Executive shall only be
entitled to receive the compensation and other payments described in paragraph
(b) above. As used in this Agreement, "Cause" shall mean (i) any material
failure of the Executive to perform his duties specified in Section 2 of this
Agreement (other than any such failure resulting from the Executive's incapacity
due to illness or other disability) after written notice of such failure has
been given to the Executive by the Board and such failure shall have continued
for 30 days after receipt of such notice, (ii) gross or willful negligence or
intentional wrongdoing or misconduct, (iii) a material breach by the Executive
of Section 5 or 6 of this Agreement, or (iv) conviction of the Executive of a
felony offense involving moral turpitude, any of which has or have a material
adverse effect on the Executive's ability to perform the duties of his position
or on the financial condition or profitability of the Company.

                  (d) Death or Disability. To provide for the event the
Executive's employment is automatically terminated on account of his death or is
terminated by either the Company or the Executive on account of Disability
(defined below), the Company shall purchase and provide for the Executive life
insurance in the amount of one times annual salary and shall purchase and
provide for the Executive supplemental executive long-term disability benefits
(to the extent necessary to provide the total benefits described herein, net of
the Company's existing group long-term disability plan) to provide salary
replacement in the amount of 60% of annual salary at the date of disability (to
continue until at least age 65, or for life if reasonably practicable). As used
herein, "Disability" means any physical or mental condition of the Executive
that (i) prevents the Executive from being able to perform the services required
under this Agreement, (ii) has continued for at least 180 consecutive days
during any 12-month period and (iii) is reasonably expected to continue. The
Company's obligation to provide to the Executive long-term disability benefits
hereunder shall be defined by the long-term disability benefits contract it is
able to procure from an unrelated third party. For that purpose, the definition
of disability shall be as stated in the contract. The Company and the Executive
recognize that the definition of Disability hereunder may differ from the
contract definition and the benefits payable shall be those as stated in the
contract. The Company, however, agrees to obtain a contract with a definition of
disability as similar as possible to the definition stated hereunder. Moreover,
the Company and the Executive agree that for purposes of the other provisions of
this Agreement, the definition of Disability as stated herein shall control.

                  (e) Termination by Company Without Cause or by the Executive
with Good Reason. If either the Company terminates the Executive's employment
for any reason other than for Cause or on account of Disability or the Executive
terminates his employment for Good Reason (as hereinafter defined), the Company
shall:

                           (i)      pay to the Executive, within 30 days after
                                    the date of such termination, a lump sum
                                    cash payment equal to 2.99 times the
                                    Executive's then current (x) annual rate of
                                    base salary and (y) target annual incentive
                                    compensation for the fiscal year in which
                                    such termination occurs;

                           (ii)     pay the Executive any accrued but unpaid
                                    compensation as of the date of the
                                    termination of employment; and

                           (iii)    continue until the first anniversary of the
                                    termination of the Executive's employment,
                                    or such longer period as any plan, program
                                    or policy or ERISA or other laws may
                                    provide, benefits to the Executive as set
                                    forth in Section 7(f) below.



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As used in this Agreement, "Good Reason" shall mean, without the Executive's
consent: (A) the failure by the Company to elect or re-elect or to appoint or
re-appoint the Executive to the office of President and Chief Executive Officer
of the Company without Cause; (B) a material change in the powers, duties,
responsibilities or functions of the Executive as described in Section 2 hereof,
including (without limitation) any change which would alter the Executive's
reporting responsibilities or cause the Executive's position with the Company to
be of less dignity, responsibility, importance or scope than the positions (and
attributes thereof) of President and Chief Executive Officer, (C) the failure of
the Executive to be elected or appointed, or re-elected or re-appointed, as a
director of the Company without Cause, (D) without the Executive's prior written
consent, the relocation of the Company's principal executive offices outside the
greater Houston, Texas metropolitan area or requiring the Executive to be based
other than at such principal executive offices, (E) the failure of the Company
to obtain any assumption agreement required by Section 16 hereof, (F) the
failure by the Company to pay the Executive within ten days after a written
demand therefor any installment of any previous award of or deferred
compensation, if any, under any employee benefit plan or any deferred
compensation program in effect in which the Executive may have participated, (G)
any other material breach of this Agreement by the Company, or (H) the
occurrence of a Change of Control.

As used in this Agreement, a "Change of Control" shall mean:

                           (i) the acquisition after the Effective Date by any
                  individual, entity or group (within the meaning of Section
                  13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
                  as amended) (a "Person") of beneficial ownership of 20% or
                  more of either (i) the then outstanding shares of common stock
                  of the Company (the "Outstanding Common Stock") or (ii) the
                  combined voting power of the then outstanding voting
                  securities of the Company entitled to vote generally in the
                  election of directors (the "Outstanding Voting Securities"),
                  provided that for purposes of this subsection (i), the
                  following acquisitions shall not constitute a Change of
                  Control: (A) any acquisition by KeySpan, (B) any acquisition
                  directly. from the Company, (C) any acquisition by the
                  Company, (D) any acquisition by any employee benefit plan (or
                  related trust) sponsored or maintained by the Company or any
                  corporation controlled by the Company, or (E) any acquisition
                  by any corporation pursuant to a transaction which complies
                  with clauses (A), (B) (C) and (D) of subsection (iii) hereof;
                  or

                           (ii) individuals, who, as of the Effective Date,
                  constitute the Board (the "Incumbent Board") cease for any
                  reason to constitute at least a majority of the Board,
                  provided that any individual becoming a director subsequent to
                  the Effective Date whose election, or nomination for election
                  by the Company's shareholders, was approved by a vote of at
                  least a majority of the directors then comprising the
                  Incumbent Board shall be considered as though such individual
                  was a member of the Incumbent Board, but excluding, for this
                  purpose, any such individual whose initial assumption of
                  office occurs as a result of an actual or threatened election
                  contest with respect to the election or removal of directors
                  or other actual or threatened solicitation of proxies or
                  consents by or on behalf of a Person other than the Board; or

                           (iii) consummation after the Effective Date of a
                  reorganization, merger or consolidation or sale or other
                  disposition of all or substantially all of the assets of the
                  Company (a "Corporate Transaction") in each case, unless,
                  following such Corporate Transaction, (A) (1) all or
                  substantially all of the persons who were the beneficial
                  owners of the Outstanding Common Stock immediately prior to
                  such Corporate Transaction beneficially own, directly or
                  indirectly, more than 60 percent of the then outstanding
                  shares of common stock of the corporation resulting from such
                  Corporate Transaction, and (2) all or substantially all of the
                  persons who were the beneficial owners of the



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                  Outstanding Voting Securities immediately prior to such
                  Corporate Transaction beneficially own, directly or
                  indirectly, more than 60 percent of the combined voting power
                  of the then outstanding voting securities entitled to vote
                  generally in the election of directors of the corporation
                  resulting from such Corporate Transaction (including, without
                  limitation, a corporation which as a result of such
                  transaction owns the Company or all or substantially all of
                  the Company's assets either directly or through one or more
                  subsidiaries) in substantially the same proportions as their
                  ownership of the Outstanding Common Stock and the Outstanding
                  Voting Securities immediately prior to such Corporate
                  Transaction, as the case may be, (B) no Person (excluding (1)
                  any corporation resulting from such Corporate Transaction or
                  any employee benefit plan (or related trust) of the Company or
                  such corporation resulting from such Corporate Transaction and
                  (2) any Person approved by the Incumbent Board) beneficially
                  owns, directly or indirectly, 20 percent or more of the then
                  outstanding shares of common stock of the corporation
                  resulting from such Corporate Transaction or the combined
                  voting power of the then outstanding voting securities of such
                  corporation except to the extent that such ownership existed
                  prior to such Corporate Transaction and (C) at least a
                  majority of the members of the board of directors of the
                  corporation resulting from such Corporate Transaction were
                  members of the Incumbent Board at the time of the execution of
                  the initial agreement or of the action of the Board providing
                  for such Corporate Transaction.

                  (f) Insurance and Other Special Benefits. To the extent the
Executive is eligible thereunder, for a period of 24 months following
termination pursuant to Section 7(e) hereof, the Executive shall continue to be
provided life insurance policies provided to the Executive on the date hereof or
such successor policies in effect at the time of the Executive's termination,
and shall also continue to be covered for the applicable period by each other
insurance, health or other benefit program, plan or policy (excluding long-term
disability) by which he was covered at the time of the Executive's termination.
In the event the Executive is ineligible to continue to be so covered under the
terms of any such life insurance, health or other benefit program, plan or
policy, the Company shall provide to the Executive through other sources such
benefits (excluding long-term disability), including such additional benefits,
as may be necessary to make the benefits applicable to the Executive
substantially equivalent to those in effect immediately prior to such
termination, provided that if during such period the Executive should enter into
the employ of another company or firm which provides to the Executive
substantially similar benefit coverage, the Executive's participation in the
comparable benefits provided by the Company, either directly or through such
other sources, shall cease. Nothing contained in this paragraph shall be deemed
to require or permit termination or restriction of any of the Executive's
coverage under any plan or program of the Company or any of its subsidiaries or
any successor plan or program thereto to which the Executive is entitled under
the terms of such plan or program, whether at the end of the aforementioned
12-month period or at any other time. Upon termination of the Executive's
employment under Section 7(d) or 7(e) hereof, any vesting, lapse of time or
similar requirement under any stock option plan, restricted stock plan or other
employee benefit or deferred compensation plan or program in which the Executive
may participate shall be accelerated to the date of such termination and any
conditions to the Executive's entitlement to any benefits under any of such
plans or programs shall be deemed to have been satisfied.

                  (g) Certain Additional Payments by the Company. Anything in
this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company to or for the benefit
of the Executive, whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all state and federal taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments. Subject to the provisions of this
Section 7(g), all determinations required to be made hereunder, including
whether a Gross-Up Payment is required and the amount of such Gross-Up Payment,



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shall be made by Arthur Andersen L.L.P. or such other accounting firm which at
the time audits the financial statements of the Company (the "Accounting Firm")
at the sole expense of the Company, which shall provide detailed supporting
calculations both to the Company and the Executive within a reasonable time
following the date of termination of the Executive's employment under this
Agreement, if applicable, or such earlier time as is requested by the Company.
If the Accounting Firm determines that no Excise Tax is payable by the
Executive, the Accounting Firm shall furnish the Executive with an opinion that
he has substantial authority not to report any Excise Tax on his federal income
tax return. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments, which will not
have been made by the Company should have been made (an "Underpayment"),
consistent with the calculations required to be made hereunder. If the Company
exhausts its remedies pursuant hereto and the Executive thereafter is required
to make a payment of any Excise Tax, the Accounting Firm shall determine the
amount of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive.

                  The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:

                  (i)      give the Company any information reasonably requested
                           by the Company relating to such claim,

                  (ii)     take such action in connection with contesting such
                           claim as the Company shall reasonably request in
                           writing from time to time, including (without
                           limitation) accepting legal representation with
                           respect to such claim by an attorney reasonably
                           selected by the Company,

                  (iii)    cooperate with the Company in good faith to
                           effectively contest such claim, and

                  (iv)     permit the Company to participate in any proceedings
                           relating to such claim;

provided that the Company shall bear and pay directly all costs and expenses
(including additional interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax or income tax, including interest and penalties with
respect thereto, imposed as a result of such representation and payment of costs
and expenses. Without limitation on the foregoing provisions hereof the Company
shall control all proceedings taken in connection with such contest and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine, provided that if the Company
directs the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax, including interest or penalties with respect
thereto, imposed with respect to such advance or with respect to any imputed
income with respect to such advance, and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is



                                       8
<PAGE>   9

claimed to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.

                  If, after the receipt by the Executive of an amount advanced
by the Company pursuant hereto, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant hereto, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.

                  (h) Either party may, within 15 days after receipt of a Notice
of Termination from the other party, provide notice to the other party that a
dispute exists concerning the termination, in which event the dispute shall be
resolved in accordance with Section 9 hereof. Notwithstanding the pendency of
any such dispute and notwithstanding any provision of this Agreement to the
contrary, the Company will (i) continue to pay the Executive the annual base
salary described in Section 3 hereof and (ii) continue the Executive as a
participant in all compensation and benefit plans in which the Executive was
participating when the relevant Notice of Termination was given, until the
dispute is finally resolved or, with respect to a Notice of Termination given by
the Executive, the date of termination specified in such Notice of Termination
if earlier, but, in each case, not past the Expiration Date. If (i) the Company
gives a Notice of Termination to the Executive, (ii) the Executive disputes the
termination as contemplated by this paragraph (h) and (iii) such dispute is
finally resolved in favor of the Company in accordance with Section 9 hereof,
the Executive shall be required to refund to the Company any amounts paid to the
Executive under this paragraph (h) but only if, and then only to the extent, the
Executive is not otherwise entitled to receive such amounts under this
Agreement.

                  8. Non-exclusivity of Rights. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its affiliated companies and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive may
have under any stock option or other agreements with the Company or any of its
affiliated companies. Amounts which are vested benefits or which the Executive
is otherwise entitled to receive under any plan or program of the Company or any
of its affiliated companies at or subsequent to the date of termination of the
Executive's employment under this Agreement shall be payable in accordance with
such plan or program.

                  9. Resolution of Disputes.

                  (a) Negotiation. The parties shall attempt in good faith to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between the Executive and a representative of the Company who has
authority to settle the controversy. Any party may give the other party written
notice of any dispute not resolved in the normal course of business. Within 10
days after the effective date of such notice, the Executive and a representative
of the Company shall meet at a mutually acceptable time and place within the
Houston, Texas metropolitan area, and thereafter as often as they reasonably
deem necessary, to exchange relevant information and to attempt to resolve the
dispute. If the matter has not been resolved within 30 days of the disputing
party's notice, or if the parties fail to meet within 10 days, either party may
initiate arbitration of the controversy or claim as provided hereinafter. If a
negotiator intends to be accompanied at a meeting by an attorney, the other
negotiator shall be given at least three business days' notice of such intention
and may also be accompanied by an attorney. All



                                       9
<PAGE>   10

negotiations pursuant to this Section 9(a) shall be treated as compromise and
settlement negotiations for the purposes of the federal and state rules of
evidence and procedure.

                  (b) Arbitration. Any dispute arising out of or relating to
this Agreement or the breach, termination or validity thereof, which has not
been resolved by nonbinding means as provided in Section 9(a) within 60 days of
the initiation of such procedure, shall be finally settled by arbitration
conducted expeditiously in accordance with the Center for Public Resources, Inc.
("CPR") Rules for Non-Administered Arbitration of Business Disputes by three
independent and impartial arbitrators, of whom each party shall appoint one,
provided that if one party has requested the other to participate in a
non-binding procedure and the other has failed to participate, the requesting
party may initiate arbitration before the expiration of such period. Any such
arbitration shall take place in Harris County, Texas. Any arbitrator not
appointed by a party shall be appointed from the CPR Panels of Neutrals. The
arbitration shall be governed by the United States Arbitration Act and any
judgment upon the award decided upon by the arbitrators may be entered by any
court having jurisdiction thereof. Each party hereby acknowledges that
compensatory damages include (without limitation) any benefit or right of
indemnification given by another party to the other under this Agreement.

                  10. Expenses. The Company shall promptly pay or reimburse the
Executive for all costs and expenses, including, without limitation, court costs
and attorneys' fees, incurred by the Executive as a result of any claim, action
or proceeding (including, without limitation a claim action or proceeding by the
Executive against the Company) arising out of, or challenging the validity or
enforceability of, this Agreement or any provision hereof which is decided or
settled substantially in favor of the Executive.

                  11. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Texas. Venue and
jurisdiction of any act on relating to this agreement shall lie in Harris
County, Texas.

                  12. Notice. Any notice, payment, demand or communication
required or permitted to be given by this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered personally or if sent
by registered or certified mail, return receipt requested, postage prepaid,
addressed to such party at its address set forth below such party's signature to
this Agreement or to such other address as shall have been furnished in writing
by such party for whom the communication is intended. Any such notice shall be
deemed to be given on the date so delivered.

                  13. Severability. In the event any provisions hereof shall he
modified or held ineffective by any court, such adjudication shall not
invalidate or render ineffective the balance of the provisions hereof.

                  14. Entire Agreement. This Agreement constitutes the sole
agreement between the parties with respect to the employment of the Executive by
the Company and supersedes any and all other agreements, oral or written,
between the parties.

                  15. Amendment and Waiver. This Agreement may not be modified
or amended except by a writing signed by the parties. Any waiver or breach of
any of the terms of this Agreement shall not operate as a waiver of any other
breach of such terms or conditions, or any other terms or conditions, nor shall
any failure to enforce any provisions hereof operate as a waiver of such
provision or any other provision hereof.

                  16. Assignment. This Agreement is a personal employment
contract and the rights and interests of the Executive hereunder may not be
sold, transferred, assigned or pledged. The Company may assign its rights under
this Agreement to (i) any entity into or with which the Company is merged or
consolidated or to which the Company transfers all or substantially all of its
assets or (ii) any entity, which at the time of such assignment, controls, is
under common control with, or is controlled by the Company, provided that the
Company, if requested



                                       10
<PAGE>   11

by the Executive, will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
reasonably acceptable to the Executive, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if such succession had not taken place.

                  17. Successors. This Agreement shall be binding upon and inure
to the benefit of the Executive and his heirs, executors, administrators and
legal representatives. This Agreement shall be binding upon and inure to the
benefit of the Company and its successors and assigns.

                  18. Section Headings. The section headings in this Agreement
have been inserted for convenience and shall not be used for interpretive
purposes or to otherwise construe this Agreement.

                  19. No Mitigation or Set-off. The provisions of this Agreement
are not intended to, nor shall they be construed to, require that the Executive
mitigate the amount of and payment provided for in this Agreement by seeking or
accepting other employment, nor shall the amount of any payment provided for in
this Agreement be reduced by any compensation earned by the Executive as a
result of his employment by another employer or otherwise except as provided in
Section 7(f) hereof. The Company's obligations to make the payments to the
Executive required under this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set off, counterclaims recoupment,
defense or other claim, right or action that the Company may have against the
Executive.

                  IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above and intend that this Agreement have
the effect of a sealed instrument.


                                       By: /s/ William G. Hargett
                                          -----------------------
                                           William G. Hargett


                                       The Houston Exploration Company


                                       By: /s/ Robert B. Catell
                                          -----------------------
                                          Name: Robert B. Catell
                                          Title: Chairman of the Board



                                       11
<PAGE>   12

                                    EXHIBIT A

Annual Incentive Plan

                  The Executive will participate in the Company's annual
incentive bonus plan which will be based on a target measure of profitability to
be determined by the Board of Directors from year to year ("Target"). If the
Company reaches 100% of Target, the Executive would earn 100% of his target
bonus. The target bonus will be determined as a percentage of the Executive's
annual salary. The percentage for the annual bonus for the Executive will be 70%
of annual salary. If the Company performs better or worse than the Target, the
bonus will be directly affected as follows:

<TABLE>
<CAPTION>
        PERCENTAGE OF TARGET EARNED BY COMPANY               PERCENTAGE OF TARGET ANNUAL INCENTIVE BONUS EARNED
        --------------------------------------               --------------------------------------------------
<S>                                                          <C>
                     Less than 70%                                                     0%
                          70%                                                         40%
                          80%                                                         60%
                          90%                                                         80%
                          100%                                                       100%
                          110%                                                       120%
                          120%                                                       140%
                          130%                                                       160%
                          140%                                                       180%
                     150% and more                                                   200%
</TABLE>

As an example, if (1) the Target is $4,500,000, (2) an executive's annual salary
is $250,000, (3) the target annual bonus percentage is 45%, and (4) actual
results achieved reach $4,500,000, the executive's target bonus would be
$112,500. Since actual results equaled 100% of Target, he would earn $112,500.
If actual results were $5,220,000 (116%), he would be entitled to 132% of his
target bonus, or $148,500.



<PAGE>   13

                  Notwithstanding the foregoing, for the first year of
employment (i.e., 2001), the Executive will be guaranteed a bonus of not less
than 70% of his annual salary.

LONG TERM INCENTIVE PLAN

                  The Executive will participate in the Company's 1996 Stock
Option Plan. The 1996 Stock Option Plan shall be paid in Company stock options
under a plan providing for qualified incentive stock options (for federal income
tax purposes) to the extent possible and non-qualified stock options for the
remainder.

                  During the Term of Employment, the Executive shall be eligible
for an option grant for that number of shares equal to a percentage of the
Executive's annual salary divided by a per share option value determined under
the Black-Scholes model. The percentage of the annual Long Term Incentive grant
for the Executive will be 150% of Base Salary. These options will vest in
accordance with the Plan at the rate of one-fifth per year of the number of
option shares beginning with the first anniversary of the award and each
anniversary thereafter with accelerated vesting in the event of (i) the
Executive`s death, (ii) termination of employment in the event of Disability if
more than 60% of such option grant had vested or (iii) termination of the
Executive's employment by the Company without Cause or by the Executive for Good
Reason. These options will have a ten year term.