<PAGE>   1
                           HANOVER COMPRESSOR COMPANY
                             1998 STOCK OPTION PLAN

1.    Preamble.

      Hanover Compressor Company, a Delaware corporation (the "Company"), hereby
establishes the Hanover Compressor Company 1998 Stock Option Plan (the "Plan")
as a means whereby the Company may, through awards of non-qualified stock
options:

           (a) provide Company Officers, employees, Directors and consultants
with additional incentive to promote the success of the Company's and its
Subsidiaries' businesses;

           (b) enable such employees to acquire proprietary interests in the
Company; and

           (c) encourage such employees to remain in the employ of the Company
and its Subsidiaries.

           (d) provide officers and directors of, and consultants to, the
Company and its Subsidiaries (who are not otherwise employees) with additional
incentive to promote the success of the businesses of the Company and its
Subsidiaries.

      Except as specifically provided herein, the provisions of this Plan do not
apply to or affect any option, stock appreciation rights, or stock heretofore or
hereafter granted under any other stock plan of the Company or any subsidiary,
and all such options, stock appreciation right or stock continue to be governed
by and subject to the applicable provisions of the plan or agreement under which
they were granted.

2.    Definitions.

      2.01 "Board" or "Board of Directors" means the board of directors of the
Company.

      2.02 "Cause" means (i) the commission by such Participant of an act of
fraud, embezzlement or willful breach of a fiduciary duty to the Company
(including the unauthorized disclosure of confidential or proprietary material
information of the Company), (ii) a conviction of such Participant (or a plea of
nolo contendere in lieu thereof) for a felony or a crime involving fraud,
dishonesty or moral turpitude, (iii) willful failure of a Participant to follow
the written directions of the chief executive officer of the Company or the
Board in the case of executive officers of the Company; (iv) willful misconduct
as an employee of the Company, (v) the willful failure of such Participant to
render services to the Company in accordance with his employment or consulting
arrangement, which failure amounts to a material neglect of his duties to the
Company or (vi) substantial dependence, as determined by the Board, on alcohol
or any drug, immediate precursor or other substance listed in Schedule I-V of
the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, as
amended, as determined in the sole discretion of the Committee.






<PAGE>   2



      2.03 "Change in Control" means the occurrence of any one of the following
events:

           (a) any (A) consolidation or merger of the Company in which the
      Company is not the continuing or surviving corporation or which
      contemplates that all or substantially all of the business and/ or assets
      of the Company shall be controlled by another corporation or (B) a
      recapitalization (including an exchange of Company equity securities by
      the holders thereof), in either case, in which any "Person" (as such term
      is used in Sections 13(d) and (14(d)(2) of the Exchange Act), other than
      the Controlling Shareholders, becomes the beneficial owner (within the
      meaning of Rule 13d-3 promulgated under the Exchange Act) of securities of
      the Company representing more than 50% of the combined voting power of the
      Company's then outstanding securities ordinarily having the right to vote
      in the election of directors;

           (b) any sale, lease, exchange or transfer (in one transaction or
     series of related transactions) of all or substantially all of the assets
     of the Company and its Subsidiaries or Affiliates;

           (c) approval by the shareholders of the Company of any plan or
     proposal for the liquidation or dissolution of the Company, unless such
     plan or proposal is abandoned within 60 days following such approval; or

           (d) any "Person" (as such term is used in Sections 13(d) and 14(d)(2)
     of the Exchange Act), other than the Controlling Shareholders, shall become
     the beneficial owner of securities of the Company representing more than
     50% of the combined voting power of the Company's then outstanding
     securities ordinarily having the right to vote in the election of
     directors.

      2.04 "Code" means the Internal Revenue Code of 1986, as it exists now and
as it may be amended from time to time.

      2.05 "Committee" means the Compensation Committee of the Board or any
other committee comprised of two or more outside Directors appointed by the
Board to administer the Plan, as the case may be. Each member of the Committee
shall (a) be a member of the Board of Directors who has not at any time within
one year prior thereto, or at any time during such member's term of service on
the Committee, received any stock options, stock appreciation rights or
allocations of any equity securities under the Plan or any other plan maintained
by the Company or any of its affiliates, except as permitted pursuant to the
provisions of Rule 16b-3(c)(2)(i) of the Exchange Act or any successor rule
thereof; and (b) be an outside Director as determined under Treasury Regulation
26 CFR ss.1.162-27(e)(3) or any successor regulation thereto. Once appointed,
the Committee shall continue to serve until otherwise directed by the Board of
Directors.

      2.06 "Common Stock" means the common stock of the Company, $.001 par
value.

      2.07 "Company" means Hanover Compressor Company, a Delaware corporation,
and any successor thereto.




                                      -2-

<PAGE>   3



      2.08 "Controlling Shareholders" means GKH Investments, L.P., GKH Partners,
L.P., and the partners therein.

      2.09 "Director" means a member of the Board.

      2.10 "Disability" means being entitled to disability benefits under the
terms of the Company's long term disability plan.

      2.11 "Exchange Act" means the Securities Exchange Act of 1934, as it
exists now or from time to time may hereafter be amended.

      2.12 "Fair Market Value" means for the relevant day:

           (a) If shares of Common Stock are listed or admitted to unlisted
      trading privileges on any national or regional securities exchange, the
      last reported sale price, regular way, on the composite tape of that
      exchange on the day Fair Market Value is to be determined;

           (b) If the Common Stock is not listed or admitted to unlisted trading
      privileges as provided in paragraph (a), and if sales prices for shares of
      Common Stock are reported by the National Association of Securities
      Dealers, Inc. Automated Quotations, Inc. National Market System ("NASDAQ
      System"), then the last sale price for Common Stock reported as of the
      close of business on the day Fair Market Value is to be determined, or if
      no such sale takes place on that day, the average of the high bid and low
      asked prices so reported; if Common Stock is not traded on that day, the
      next preceding day on which such stock was traded; or

           (c) If trading of the Common Stock is not reported by the NASDAQ
      System or on a stock exchange, Fair Market Value will be determined by the
      Committee in its discretion based upon the best available data.

      2.13 "Officer" means a corporate or equivalent officer of the Company or
any Subsidiary or Affiliate of the Company.

      2.14 "Option" means the right of a Participant to purchase a specified
number of shares of Common Stock, subject to the terms and conditions of the
Plan.

      2.15 "Option Date" means the date upon which an Option is awarded to a
Participant under the Plan.

      2.16 "Option Price" means the price per share at which an Option may be
exercised.

      2.17 "Participant" means an individual to whom an Option has been granted
under the Plan.

      2.18 "Plan" means the Hanover Compressor Company 1998 Stock Option Plan,
as set forth herein and as from time to time amended.





                                      -3-

<PAGE>   4


      2.19 "Securities Act" means the Securities Act of 1933, as it exists now
or from time to time may hereinafter be amended.

      2.20 "Subsidiary" means any corporation or other entity of which the
majority voting power or equity interest is owned directly or indirectly by the
Company.

      2.21 "Termination of Employment" means,

           (a) with respect to an employee when the employee's employment
           relationship with the Company and all of its Subsidiaries is
           terminated, regardless of any severance arrangements. A transfer from
           the Company to a Subsidiary or affiliate, or vice versa is not a
           termination of employment for purposes of this Plan; 

           (b) with respect to a consultant when the consultant's consulting
           relationship with the Company is terminated either due to the
           termination of any consulting agreement, or otherwise, regardless of
           the fact that no employment relationship exists;

           (c) with respect to an Officer or Director when such individual is no
           longer serving as an Officer or Director of the Company, as a
           consultant to or employee of the Company and any of its Subsidiaries.

      2.22 Rules of Construction.

           (a) Governing Law. The construction and operation of this Plan are
      governed by the laws of the State of Delaware.

           (b) Undefined Terms. Unless the context requires another meaning, any
      term not specifically defined in this Plan has the meaning given to it by
      the Code.

           (c) Headings. All headings in this Plan are for reference only and
      are not to be utilized in construing the Plan.

           (d) Gender. Unless clearly appropriate, all nouns of whatever gender
      refer indifferently to persons of any gender.

           (e) Singular and Plural. Unless clearly inappropriate, singular terms
      refer also to the plural and vice versa.

           (f) Severability. If any provision of this Plan is determined to be
      illegal or invalid for any reason, the remaining provisions shall continue
      in full force and effect and shall be construed and enforced as if the
      illegal or invalid provision did not exist, unless the continuance of the
      Plan in such circumstances is not consistent with its purposes.




                                      -4-


<PAGE>   5


3.    Stock Subject to the Plan.

      Except as otherwise provided in Section 10, the aggregate number of shares
of Common Stock that may be issued under Options under this Plan may not exceed
260,000 shares of Common Stock. Reserved shares may be either authorized but
unissued shares or treasury shares, in the Board's discretion. If any grants
hereunder shall terminate or expire such shares shall be eligible to be granted
as new Options under this Plan. Except as otherwise provided in Section 12, the
aggregate number of shares of Common Stock that may be issued under Options to
any one individual Participant may not exceed 60,000 shares.

4.    Administration.

      The Plan shall be administered by the Committee. In addition to any other
powers set forth in this Plan, the Committee has the exclusive authority:

           (a) to construe and interpret the Plan, and to remedy any ambiguities
      or inconsistencies therein;

           (b) to establish, amend and rescind appropriate rules and regulations
      relating to the Plan;

           (c) subject to the express provisions of the Plan, to determine the
      individuals who will receive grants of Options, the times when they will
      receive them, the number of shares to be subject to each award and the
      Option Price, payment terms, payment method, and expiration date
      applicable to each award;

           (d) to contest on behalf of the Company or Participants, at the
      expense of the Company, any ruling or decision on any matter relating to
      the Plan or to any grants of Options;

           (e) generally, to administer the Plan, and to take all such steps and
      make all such determinations in connection with the Plan and the grants of
      Options as it may deem necessary or advisable;

           (f) to determine the form in which tax withholding under Section 13
      of this Plan will be made; and

           (g) to amend the Plan or any Option granted hereunder as may be
      necessary in order for any business combination involving the Company to
      qualify for pooling-of-interest treatment under APB No. 16.

5.    Eligible Participants

      All employees, Officers, and Directors of the Company and its
Subsidiaries, and those consultants (who are not otherwise employees of the
Company or any of its Subsidiaries) are 




                                      -5-

<PAGE>   6


eligible to participate in the Plan. Subject to the provisions of the Plan, the
Committee shall determine from time to time those individuals who shall be
designated as Participants and the number, if any, of Options to be granted to
each such Participant;

6.    Terms and Conditions of Options.

      All Options granted under this Plan shall be nonstatutory options, which
are not intended to be classified as "incentive stock options" under Section 422
of the Code. The Committee may, in its discretion, grant Options to any
Participant under the Plan. Each Option shall be evidenced by an agreement
between the Company and the Participant. Each Option agreement, in such form as
is approved by the Committee, shall be subject to the following express terms
and conditions and to such other terms and conditions, not inconsistent with the
Plan as the Committee may deem appropriate:

           (a) Option Period. Each Option will expire as of the earliest of:

               (i)   ten years from the Grant Date;

               (ii)  the date on which it is forfeited under the provisions of
           Section 8;

               (iii) the date three months after the Participant's Termination
           of Employment for any reason other than death or Disability; or

               (iv)  the date twelve months after the Participant's death or
           Disability.

           (b) Option Price. At the time when the Option is granted, the
      Committee will fix the Option Price. The Option Price may be greater than,
      less than, or equal to Fair Market Value on the Option Date, as determined
      in the sole discretion of the Committee.

           (c) Other Option Provisions. The form of Option authorized by the
      Plan may contain such other provisions as the Committee may from time to
      time determine.




                                      -6-

<PAGE>   7


7.    Manner of Exercise of Options.

      To exercise an Option in whole or in part, a Participant (or, after his
death, his executor or administrator) must give written notice to the Committee,
stating the number of shares to which he intends to exercise the Option. The
Company will issue the shares with respect to which the Option is exercised upon
payment in full of the Option Price. The Option Price may be paid (i) in cash,
(ii) in shares of Common Stock having an aggregate Fair Market Value, as
determined on the date of delivery, equal to the Option Price, (iii) if
permitted by the Committee, by cash or certified or cashier's check for the par
value of the Plan Shares plus a promissory note for the balance of the purchase
price, which note shall provide for full personal liability of the maker and
shall contain such other terms and provisions as the Committee may determine,
including without limitation the right to repay the note partially or wholly
with Common Stock, or (iv) by delivery of irrevocable instructions to a broker
to promptly deliver to the Company the amount of sale or loan proceeds necessary
to pay for all Common Stock acquired through such exercise and any tax
withholding obligations resulting from such exercise. The Option Price may be
paid in shares of Common Stock which were received by the Participant upon the
exercise of one or more Options.

8.    Vesting.

      A Participant may not exercise an Option until it has become vested. The
portion of an Option award that is vested depends upon the period that has
elapsed since the Option Date. Unless the Committee establishes a different
vesting schedule at the time when an Option is granted, all Options granted
under this Plan shall vest according to the following schedule:

<TABLE>
<CAPTION>


            Period Elapsed                        Vested Percentage
            --------------                        -----------------
<S>                                               <C>
First Anniversary of Option Date                         10%
Second Anniversary of Option Date                        30%
Third Anniversary of Option Date                         60%
Fourth Anniversary of Option Date                       100%
</TABLE>

Except as provided below, upon a Termination of Employment, a Participant
forfeits any Options that are not yet vested. Unless the Committee in its sole
discretion specifically waives the application of this sentence, then
notwithstanding the vesting schedule contained herein or in the Participant's
agreement, if the Participant's Termination of Employment is terminated for
Cause all Options granted to the Participant will be immediately cancelled and
forfeited by the Participant upon delivery to him of notice of such termination
for Cause.

9.    Change of Control.

      Notwithstanding the provisions of Section 8 or anything contained in a
Participant's agreement to the contrary, upon a Change in Control all Options
shall be subject to the following:



                                      -7-


<PAGE>   8



           (a) The Company shall have the right to acquire from Participants
      their vested Options by payment of the difference between the price per
      share of Common Stock established in the Change of Control and the Option
      Price; and

           (b) All unvested Options shall either (i) convert into options to
      purchase securities of the acquirer in the Change of Control on the same
      terms and conditions as apply to the Options under the Plan, (ii) convert
      into such consideration as the Participant would have received had the
      Options been fully vested, or (iii) be treated as otherwise determined by
      the Committee.

10.   Adjustments to Reflect Changes in Capital Structure.

      If there is any change in the corporate structure or shares of the
Company, the Committee may, in its discretion, make any adjustments necessary to
prevent accretion, or to protect against dilution, in the number and kind of
shares authorized by the Plan and, with respect to outstanding Options, in the
number and kind of shares covered thereby and in the applicable Option Price.
For the purpose of this Section 10, a change in the corporate structure or
shares of the Company includes, without limitation, any change resulting from a
recapitalization, stock split, stock dividend, consolidation, rights offering,
spin-off, reorganization, or liquidation and any transaction in which shares of
Common Stock are changed into or exchanged for a different number or kind of
shares of stock or other securities of the Company or another entity.

11.   Non-Transferability of Options.

      The Options granted under the Plan are not transferable, voluntarily or
involuntarily, other than by will or the laws of descent and distribution, or to
the extent permissible under Section 422 of the Code pursuant to a qualified
domestic relations order as defined in Section 414(p) of the Code. During a
Participant's lifetime his Options may be exercised only by him.

12.   Rights as Stockholder.

      No Common Stock may be delivered upon the exercise of any Option until
full payment has been made and all income tax withholding requirements thereon
have been satisfied. A Participant has no rights whatsoever as a stockholder
with respect to any shares covered by an Option until the date of the issuance
of a stock certificate for the shares.

13.   Withholding Tax.

      The Company shall have the right to withhold in cash or shares of Common
Stock with respect to any payments made to Participants under the Plan any taxes
required by law to be withheld because of such payments.





                                      -8-


<PAGE>   9


14.   Non-Competition and Confidential Information.

      Each Participant receiving Options shall be subject to the restriction
that, during the term of his Option Agreement and for a period of two years
thereafter, he or she (i) will not compete with any business of the Company or
its Subsidiaries and (ii) will not disclose to persons outside the Company
confidential information concerning the Company or its Subsidiaries without the
Company's express written consent.

15.   No Right To Employment.

      Participation in the Plan will not give any Participant a right to be
retained as an employee of the Company or any Subsidiary, or any right or claim
to any benefit under the Plan, unless the right or claim has specifically
accrued under the Plan.


16.   Amendment of the Plan.

      The Committee may from time to time amend or revise the terms of this Plan
in whole or in part and may, without limitation, adopt any amendment deemed
necessary; provided, however, that, except as provided in Section 4(g), no
change in any Options previously granted to a Participant may be made that would
impair the rights of the Participant without the Participant's consent.

17.   Conditions Upon Issuance of Shares.

      An Option shall not be exercisable and a share of Common Stock shall not
be issued pursuant to the exercise of an Option until such time as the Plan has
been approved by the Board of Directors and unless the exercise of such Option
and the issuance and delivery of such share pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares of Common Stock may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Common Stock is being
purchased only for investment and without any present intention to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.

18.   Effective Date and Termination of Plan.

      18.1    Effective Date. This Plan is effective as of the date of its 
adoption by the Board of Directors. Prior to the Board of Director's approval,
the Committee may, in its discretion, grant options under the Plan as if the
Plan were effective, provided the exercise of the options so granted shall be
expressly subject to the approval of the Plan by the Board of Directors.






                                      -9-

<PAGE>   10


      18.2    Termination of the Plan. The Board may terminate the Plan at any
time with respect to any shares that are not then subject to Options.
Termination of the Plan will not affect the rights and obligations of any
Participant with respect to Options granted before termination.


                                    * * * * *


      I hereby certify that the foregoing Plan was adopted by the Board of
Directors of Hanover Compressor Company on ______________, 1998.

Executed as of _________________, 1998





------------------------------------
Michael A. O'Conner
Chairman - Director



                                      -10-