DOMESTIC INCENTIVE PLAN
                                       OF
                            HALLWOOD PETROLEUM, INC.


     Hallwood Petroleum, Inc., a Delaware corporation (the "Company"), hereby
establishes the following Domestic Incentive Plan, which is intended to provide
greater incentive and motivation to the Company's key personnel to increase the
domestic oil and gas reserves of the affiliates of the Company for which the
Company provides management and operational services and to enhance the
Company's ability to attract, motivate and retain key employees upon whom, in
large measure, the success of the Company and its Affiliates depends.

                                    ARTICLE I
                                   DEFINITIONS

     The following words and phrases shall have the meaning set forth below
unless the context clearly indicates otherwise:

     "Affiliates" means the affiliates of the Company for which the Company
provides management and operational services, including, but not limited to,
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
Hallwood Energy Corporation and Hallwood San Juan #1, L.L.C.

     "Beneficiary" means a Beneficiary designated pursuant to Section 6.6.

     "Board" means the Board of Directors of the Company or any committee of the
Board of Directors to which the Board may delegate its authority to act in
connection with this Plan from time to time.  The Board shall, with regard to
other than procedural matters related to this Plan, act after consultation and
recommendation from the boards of directors of the Affiliates of the Company.

     "Buy-Out Value" shall mean that percentage of the net present value of the
then remaining proven reserves of an Eligible Well, as determined by the Board
at the time any award is made under the Plan.  The net present value of the then
remaining proven reserves of an Eligible Well shall be determined based on the
Reserve Report.If the net present value of the proven reserves of an Eligible
Well is less than zero, the Buy-Out Value shall be zero.

     "Cash Flow" from an Eligible Well means, with regard to the period in
question, (i) all revenues received by the Company or its Affiliates from the
sale of production from the Eligible Well plus (ii) all proceeds received from
the sale of an interest in the Eligible Well to other than an Affiliate, less in
each case (A) all operating expenses paid by the Company or its Affiliates and
normally attributable to a working interest in the Eligible Well; (B) all
amounts paid by the Company or its Affiliates to improve, recomplete or maintain
the production from an Eligible Well (other than amounts spent in connection
with the initial spudding, drilling and first Completion of the Eligible Well or
recompletion of a Marginal Well); and (C) all severance, production or other
production related taxes paid by the Company and its Affiliates and applicable
to the Eligible Well.  

     "Company" means Hallwood Petroleum, Inc. and any successor thereto.

     "Completion" of an Eligible Well or a "Completed" Eligible Well means (i)
with regard to an initial drilling, the date such well is spud; (ii) with regard
to the recompletion of a Marginal Well, the date when a completion, workover or
drilling rig is moved in and rigged up in preparation of imminent work
initiation or (iii) with regard to secondary or tertiary recovery operations,
the date of first injection of any fluids used for secondary or tertiary
recovery.

     "Effective Date" means January 1, 1992. 

     "Eligible Well" means any domestic well Completed within the Plan Year, any
recompleted Marginal Well (in which case the value to be assigned to such
recompleted Marginal Well shall be the incremental value attributable to the
recompletion), or any secondary or tertiary recovery operation (in which case
the value to be assigned to such secondary or tertiary recovery wells not
already included in a Plan, shall be calculated by holding constant the proven
developed producing reserve rate at the time of first injection, and only
considering the production above that rate as added value).

     "Key Employee" means an employee or consultant of the Company who the
Board, in its sole discretion, determines has or may substantially benefit the
Company.

     "Marginal Well" means any well having a net present value, on the Reserve
Report, of less than or equal to $25,000.

     "Participant" means a Key Employee who is selected by the Board to
participate in the Plan for any Plan Year.

     "Participation Point" means one percent of the Plan Cash Flow for any Plan
Year; 100 Participation Points shall be awarded to Participants in any Plan Year
during which any awards are made.

     "Plan" means this Domestic Incentive Plan of Hallwood Petroleum, Inc.

     "Plan Cash Flow" means the aggregate percentage of the Affiliates'
collective interest in the Cash Flow of the Eligible Wells that the Board
determines for any Plan Year to allocate to the Plan, and which is to be divided
among the Participants based on Participation Points.

     "Plan Distributions" attributable to any Participant's Participation Points
means (i) the Plan Cash Flow attributable to the Participation Points and (ii)
the Buy-Out Value of the Participation Points upon buy-out pursuant to Section
3.4.

     "Plan Year" means the twelve-month calendar year.  

     "Reserve Report" means the most recent regularly prepared reserve report
which applies the rules and regulations of the Securities and Exchange
Commission, except that average, twelve month prices, rather than year-end
prices, shall be used.

     "Termination for Cause" means termination which is initiated by the Company
for either misconduct or poor performance.

                                   ARTICLE II
                            PARTICIPATION IN THE PLAN

     2.1    Eligibility.  Any Key Employee of the Company shall be eligible to
be selected as a Participant in the Plan.  A Key Employee shall become a
Participant upon receiving an award of Participation Points by the Board, which
shall act upon the recommendation of the boards of directors of its Affiliates,
which in turn may take into consideration, among other factors, the
recommendation of the Company's and the Affiliates' executive officers, the Key
Employee's position, salary, and individual contribution to the performance of
the Company's Affiliates.  Only Key Employees who are employed by or engaged as
consultants to the Company on the date of the award by the Board shall be
eligible to be awarded Participation Points. 

     2.2    Enrollment Procedure.  Each Participant shall complete, sign, and
return to the Company's Human Resources department an enrollment form supplied
by the Company.  The enrollment form shall state, among other information, the
Participant's address and date of birth and a designation of the names and
addresses of the Participant's beneficiaries.  The Participant will not be
entitled to receive any payments with respect to the Plan until the Participant
has properly returned the enrollment form.

                                   ARTICLE III
                    ALLOCATION AND DISTRIBUTION OF NET INCOME

     3.1    Determination of Participants and Awards.  The Board may, based upon
the recommendation of the boards of directors of its Affiliates, determine
annually the Key Employees who are to be Participants in the Plan with respect
to the Plan Year, the percentage of the total Plan Cash Flow to be allocated to
awards for the Plan Year, the Plan Buy-Out Value, and the Participation Points
to be awarded to each Participant.  The Board may make these determinations in
its sole discretion, is not required to allocate any Plan Cash Flow for a Plan
Year and may award all Participation Points for a Plan Year to one Participant. 
It is anticipated that determinations of the Plan Cash Flow allocated for a Plan
Year, the Participants, the Plan Buy-Out Value and the Participation Points for
a Plan Year will be made concurrently with the first regular meeting of the
Board held each year.  The first such determinations shall be made in 1993 with
respect to the 1992 Plan Year, and shall be effective from January 1, 1992.  All
allocations shall be made on a well-by-well basis or in such other manner as the
Board may determine.  

     3.2    Effect of Award.  Subject to Section 3.5, a Participant who is
awarded Participation Points shall receive the Plan Cash Flow attributable to
those Participation Points for a total of five calendar years, beginning with
the Plan Year for which the Participation Points were awarded, as provided in
Section 3.3, and in the sixth calendar year shall receive the Buy-Out Value, as
provided in Section 3.4.

     3.3    Distribution of Plan Cash Flow.  On all outstanding awards, the
Company shall distribute to each Participant the portion of the Plan Cash Flow
attributable to the Participation Points then held by the Participant for each
Plan Year.  The distributions shall be made quarterly to each Participant or his
Beneficiary in the amount of such person's allocable share of the Plan Cash Flow
for the preceding quarter, less any applicable withholding of income taxes or
other amounts. Distributions shall be made within thirty days of the end of a
quarter.

     3.4    Buy-out of Plan's Interest.  As of January 1 of the sixth year that
Cash Flow from an Eligible Well has been allocated under the Plan, the Buy-Out
Value, if any, of an Eligible Well shall be paid to the Participants with
respect to that Eligible Well and thereafter no further Cash Flow from such
Eligible Well shall be paid to the Participants. All payments under this section
shall be made on or before the end of the first quarter of the sixth year. 

     3.5    Vesting.

          (a)  If a Participant's employment with the Company is terminated by
the Participant or by the Company as a Termination for Cause, the Participant
shall cease to be a Participant in this Plan and all Participation Points of the
Participant under this Plan shall be canceled without payment of any
compensation and the former Participant shall not thereafter receive any Plan
Distributions. Any Participation Points cancelled hereunder and the related Plan
Cash Flow shall  revert to the Affiliates, and shall not be available to any
other Participant.

          (b)  If a Participant's employment with the Company is terminated by
the Company as other than a Termination for Cause, the Participant shall, at the
option of the Company, (a) continue to receive Plan Distributions in the same
manner as though such Participant were still employed by the Company, or (b)
receive a cash lump sum payment equal to the present value of such Participant's
interest in the estimated remaining Plan Distributions, including the  Buy-Out
Value, based on the most recent Reserve Report, each of (a) and (b) being based
on the Participation Points held by the Participant at the date of termination
of employment. 

          (c)  If a Participant dies or is permanently and totally disabled, the
Participant (or the Participant's Beneficiary) shall, at the option of the
Company, (a) continue to receive Plan Distributions in the same manner as though
such Participant were still employed by the Company, or (b) receive a cash lump
sum payment equal to the present value of such Participant's interest in the
estimated remaining Plan Distributions, including the  Buy-Out Value, based on
the most recent Reserve Report, each of (a) and (b) being based on the
Participation Points held by the Participant at the date of death or
disablement.

          (d)  If the Company determines under subsection (b) or (c) to exercise
the option of making a cash lump sum payment, then it shall notify the
terminated or disabled Participant, or a deceased Participant's Beneficiary, of
such option within 45 days of the termination of such Participant's employment
or consultancy with the Company. Payment for any interest so purchased shall be
made by the Company, by check, within 60 days after such termination.  

                                   ARTICLE IV
                  ALLOCATION OF ADMINISTRATIVE RESPONSIBILITIES

     4.1    The Company.  The Company shall be responsible for keeping accurate
books and accounts with respect to all Eligible Wells, Plan Cash Flow and Plan
Distributions and making the payments to Plan Participants provided by the Plan.

     4.2    The Board.  The Board shall administer the Plan and shall have all
powers necessary for that purpose, including, but not limited to, the power to
interpret the Plan, to determine the eligibility, status and rights of all
persons under the Plan, to make all determinations required to be made under the
Plan.

     4.3    Others. The Board of the Company may designate  one or more persons
who may, but need not be, employees of the Company or Participants, to assist it
in the ministerial tasks required in administering the Plan.  The Company hereby
indemnifies each person so designated by the Board against any and all claims,
loss, damages, expense and liability arising from any action or failure to act
with respect to the Plan, except when the same is judicially determined to be
due to the fraud, gross negligence or willful misconduct of such person.

                                    ARTICLE V
                            TERMINATION AND AMENDMENT

     5.1    Termination of Plan and Discontinuance of Contributions.  The
Company presently intends to continue the Plan indefinitely, but the continuance
of the Plan is not assumed as a contractual obligation and the Company may
terminate the Plan at any time by delivering written notice of termination to
each Participant and Beneficiary then entitled to receive distributions pursuant
to the Plan.  In addition, the sale or exchange of all or substantially all of
the assets of an Affiliate of the Company (to other than an Affiliate of the
Company), the merger of the Company or an Affiliate (if the Company or an
Affiliate is not the surviving entity) or any material change in the direct or
indirect ownership or control of the Company or an Affiliate (if the new owner
is not an Affiliate) or the liquidation of the Company or an Affiliate, shall
automatically terminate the Company's obligations under the Plan (as such
obligations relate to such Affiliates' Eligible Wells, other than the
obligations under Section 5.2).

     5.2    Procedure Upon Termination.  Upon termination of the Plan, the
Company shall, at its option, (i) distribute to each Participant or Beneficiary
then participating in the Plan, in one lump sum or in three equal annual
installments with interest at the base rate required in order to avoid the
imputation of interest under section 483 of the Internal Revenue Code, or any
successor provision, an amount equal to the present value of such Participant's
or Beneficiary's interest in the estimated remaining Plan Distributions,
including the Buy-Out Value, based on the most recent Reserve Report, or (ii)
continue to make Plan Distributions in accordance with the provisions of the
Plan existing at the time of termination, or (iii) transfer and assign to each
Participant and Beneficiary who then holds Participation Points, in proportion
to each such person's Participation Points, actual working interests in the
Eligible Wells used to determine Plan Distributions, all as the Board in its
sole discretion may determine.

     5.3    Amendment by the Company.  The Company may at any time amend the
Plan in any respect by action of its Board, but no amendment shall be made that
would have the effect of materially and adversely affecting the economic
interest of any person under the Plan with respect to previously awarded
Participation Points.

                                   ARTICLE VI
                                  MISCELLANEOUS

     6.1    Right to Dismiss Employees and Consultants.  The Company may
terminate the employment of any employee or consultant at any time as freely as
if this Plan were not in existence.

     6.2    Source of Benefits.  The obligations hereunder are undertaken by the
Company and the Affiliates, and all benefits payable under the Plan shall be
paid solely from the general assets of the Company and or its Affiliates, and no
allocation of interests or income on the books of the Company or the Affiliates
shall be deemed to create a separate fund or any ownership interest on the part
of any Participant in any Eligible Wells being used to measure Plan
Distributions or in any production from properties.

     6.3    No Ownership of Properties; Other Rights.  Nothing contained in this
Plan shall in any way restrict the right of the Company or the Affiliates in
their discretion to operate, abandon, sell, transfer, mortgage, encumber or
otherwise deal with the Eligible Wells giving rise to the revenues used to
measure Plan Distributions.  Any rights accruing to a Participant or other
person under the Plan are solely those of an unsecured general creditor of the
Company.  Nothing contained in the Plan and no action taken pursuant to the
provisions of the Plan will create or be construed to create a trust of any
kind, or a pledge, or an economic interest in the Eligible Wells, or a fiduciary
relationship between the Company, an Affiliate, and a Participant or any other
person.  Nothing in the Plan will be construed to require that any fund be
maintained or any amount be segregated for a Participant's benefit.

     6.4    Sale of Eligible Wells.  If an Eligible Well is sold or in any way
transferred to other than an Affiliate during the time that the Eligible Well is
subject to the Plan, the value of the consideration received in connection with
the transfer will be considered to be Cash Flow from such Eligible Well and will
be distributed as Plan Cash Flow at the time and in the manner required by
Section 3.3.

     6.5    Deductibility under Internal Revenue Code.  If the Company believes
in good faith that a Participant may receive total compensation from the Company
in one calendar year in excess of the amount which may be deducted by the
Company under Internal Revenue Code section 162 (m), then the Company may defer
such excess payments until the first year when they would be deductible.

     6.6    Beneficiaries.  Each Participant shall file with the Company a
designation of the Beneficiaries and contingent Beneficiaries to whom income
attributable to the Participant's interest under the Plan shall be paid in the
event of the Participant's death.  Such designation may be changed by the
Participant at any time and without the consent of any previously designated
Beneficiary.  In the absence of an effective Beneficiary designation as to any
portion of a Participant's interest under the Plan, Plan Distributions
attributable to such interest shall be paid to the Participant's personal
representative, but if the Company believes that none had been appointed within
six months after the Participant's death, the Company may elect not to pay such
income until a personal representative has been appointed or may pay such income
to the Participant's surviving spouse, or if none, to his surviving children and
issue of deceased children by right of representation, or if there be none, to
his surviving parents.

     6.7    Non-Transferability of Benefits.  No Participant or other person
shall have any right to assign, alienate, transfer, hypothecate, encumber or
anticipate any interest in any benefits under this Plan, nor shall such benefits
be subject to any legal process to levy upon or attach the same for payment of
any claim against any such Participant or other person through any process
whatsoever, and any attempt to cause such rights to be so subjected will not be
recognized except to such extent as may be required by law.

     6.8    Payment Due Minor or Incapacitated Persons.  If any person entitled
to a payment under the Plan is a minor, or if the Company determines that any
such person is incapacitated by reason of physical or mental disability, whether
or not legally adjudicated as such, the Company shall have the power to cause
the payments becoming due to such person to be made to his personal
representative or to another for his benefit, without responsibility of the
Company to see to the application of such payments.  The Company shall have no
responsibility to investigate the physical or mental condition of a Participant
and any determination of disability made by the Company shall be binding on the
Participant and all other persons.  Payments made pursuant to such power shall
operate as a complete discharge of the Plan and the Company.

     6.9    Disposition of Unclaimed Payments.  Each Participant must file with
the Company from time to time in writing his address and the address of each of
his Beneficiaries and each change of address.  Any communication, statement or
notice addressed to a Participant or Beneficiary at his last post office address
filed with the Company, or if no address is filed with the Company then at his
last post office address as shown on the Company's records, will be binding on
the Participant and his Beneficiaries for all purposes of the Plan.  The Company
shall not be required to search for or locate a Participant or Beneficiary.  If
the Company notifies a Participant or Beneficiary that he is entitled to a
distribution and also notifies him of the provisions of this section, and the
Participant or Beneficiary fails to make his address known to the Company within
three calendar years after the notification, the Participation Points of the
Participant Beneficiary will be forfeited and canceled as of the end of the Plan
Year following the expiration of such three year period.

     6.10   Governing Law.  The construction and interpretation of this Plan
shall be governed by the laws of the State of Colorado.  

     6.11 Pronouns; Gender and Number.  Unless the context clearly indicates
otherwise, words in any gender shall include the other genders and the singular
shall include the plural and vice versa.


As of January 14, 1993.

                              HALLWOOD PETROLEUM INC., as agent for Hallwood
                              Energy Partners, L.P., Hallwood Consolidated
                              Resources Corporation, Hallwood Energy Corporation
                              and  Hallwood San Juan #1
                              L.L.C.

                              /s/William L. Guzzetti
                              ----------------------------------
                              William L. Guzzetti
                              President<PAGE>