May 5, 1998



Mr. Thomas J. Jung
7644 S. Madison Circle
Littleton, Colorado  80112


         Re:      Options for Shares of Common Stock

Dear Mr. Jung:

     As we  discussed,  in  connection  with your recent  employment by Hallwood
Petroleum,  Inc., Hallwood  Consolidated  Resources  Corporation (the "Company")
hereby  grants  you,  effective  as of the date of this  letter,  an option (the
"Option") to acquire Nine  Thousand  Five Hundred  Forty  (9,540)  shares of the
common stock of the Company.

     Although your Option has not been granted pursuant to a previously existing
option plan,  your Option will be subject to terms and  conditions  identical to
those in the  Company's  1995 Share  Option Plan (the  "Option  Plan"),  and the
associated  1995 Share Option Plan Loan Program  (the "Loan  Program").  We have
enclosed  copies of the Option Plan and the Loan Program for your  reference and
review.  The  following  is a  description  of the Option.  Terms not  otherwise
defined in this  letter  have the same  meanings  ascribed to them in the Option
Plan. You are referred to as the Optionee in the following description.

     1. Option Price. The Option price is $15 3/4 for each Share.

     2. Date of Grant.  The  Option is  granted  as of May 5, 1998 (the "Date of
Grant").

     3. Exercise of Option.  The Option shall be exercisable in whole or in part
in accordance with the provisions of the Option Plan as follows:

          (i) Schedule of Rights to Exercise.

               (a) 3180 Shares upon the Date of Grant,

               (b) 3180 Shares after May 5, 1999,

               (c) 3180 Shares after May 5, 2000,

or on such earlier date as the Option may vest in  accordance  with Section 7(d)
of the Option Plan,  but subject  always to the limits set forth in Section 7(e)
of the Option Plan.

          (ii) Method of Exercise.  The Option shall be exercisable by a written
     notice delivered to the Company that shall:

               (a) state the  election to exercise  the Option and the number of
          Shares in respect of which it is being exercised; and

               (b) be signed by the person or persons  entitled to exercise  the
          Option and, if the Option is being  exercised by any person or persons
          other than the Optionee, be accompanied by proof,  satisfactory to the
          Company,  of the  right of such  person or  persons  to  exercise  the
          Option.

          (iii)  Payment.  The exercise price of any Shares  purchased  shall be
     paid solely in cash, by certified or cashier's check, by money order,  with
     Shares  (provided  that at the time of exercise  the  Committee in its sole
     discretion  does not prohibit the exercise of Options  through the delivery
     of  Shares  owned  by  the  Optionee  for  at  least  six  months)  or by a
     combination of the above; provided, however, that the Committee in its sole
     discretion  may accept a personal  check in full or partial  payment of any
     Shares. If the exercise price is paid in whole or in part with Shares,  the
     value of the Shares  surrendered  shall be their Fair  Market  Value on the
     date received by the Company.  Any Shares  delivered in satisfaction of all
     or a portion of the  exercise  price shall be  appropriately  endorsed  for
     transfer and assignment to the Company.

          (iv) Withholding. The Optionee shall make arrangements satisfactory to
     the Company for the withholding of any amounts necessary for withholding in
     accordance with applicable Federal or state income tax laws.

          (v) Issuance of Shares.  No person shall be, or have any of the rights
     or privileges  of, a Shareholder  of the Company with respect to any of the
     Shares subject to an Option unless and until certificates representing such
     Shares shall have been issued and delivered to such person.  As a condition
     of any issuance of a certificate for Shares,  the Committee may obtain such
     agreements or  undertakings,  if any, as it may deem necessary or advisable
     to  assure  compliance  with  any  provision  of the  Plan,  the  agreement
     evidencing the Option or any law or regulation  including,  but not limited
     to, the following:

               (a) A  representation,  warranty or  agreement by the Optionee to
          the Company at the time any Option is  exercised  that he is acquiring
          the Shares to be issued to him for  investment and not with a view to,
          or for sale in connection  with, the  distribution of any such Shares;
          and

               (b) A  representation,  warranty or  agreement to be bound by any
          legends  that are,  in the  opinion  of the  Committee,  necessary  or
          appropriate  to comply  with the  provisions  of any  securities  laws
          deemed by the Committee to be applicable to the issuance of the Shares
          and are endorsed upon the Share certificates.

          (vi)  Surrender  of  Option.  Upon  exercise  of  Option  in part,  if
     requested by the Company,  the Optionee  shall deliver Option and any other
     written agreements executed by the Company and the Optionee with respect to
     Option to the Company who shall  endorse or cause to be endorsed  thereon a
     notation of such exercise and return all agreements to the Optionee.

     4. Transferability of Option. In the Optionee's discretion,  The Option may
be transferred by the Optionee by gift or by  contribution  to (a) any member of
Optionee's  immediate  family;  (b) any entity of which  Optionee  or members of
Optionee's  family are the sole equity owners or beneficiaries  or, if there are
discretionary beneficiaries,  among the class of discretionary beneficiaries; or
(c) any combination of the foregoing.

     5. Term of Option.  The Option may not be exercised after the expiration of
ten (10)  years  from the Date of Grant of the  Option and is subject to earlier
termination  as provided in Section 8 of the Plan.  The Option may be  exercised
during such term only in accordance with the Plan and the terms of the Option.

     6.  Administration.  The  Option  shall be  administered  by the  Committee
provided for and described in Section 13 of the Plan.

     If this letter agreement correctly sets forth your understanding  regarding
the  Options,  please  acknowledge  and accept the award by signing in the space
provided below.


                                        Sincerely,

                                        HALLWOOD CONSOLIDATED
                                        RESOURCES CORPORATION



                                     /s/Russell P. Meduna
                                        Russell P. Meduna
                                        Executive Vice President


<PAGE>








     I acknowledge  receipt of the letter dated May 5, 1998  regarding the award
of a Share  Option,  a copy of the 1995  Option Plan and the Loan  Program,  and
represent that I am familiar with the terms and provisions  thereof,  and hereby
accept the Option  subject to all the terms and  provisions of this letter,  the
Option  Plan and the  Loan  Program.  I  hereby  agree  to  accept  as  binding,
conclusive  and final all  decisions or  interpretations  of the  Committee  (as
defined in the Option Plan ) upon any questions arising under my Option.



-----------------                              --------------------------
         Date                                         Thomas J. Jung