1998 CLASS C UNIT OPTION PLAN LOAN PROGRAM
                                       FOR
                         HALLWOOD ENERGY PARTNERS, L.P.

     Section 1.  Purpose.  This 1998 Class C Unit Option Plan Loan Program (this
"Loan Program") for Hallwood Energy Partners,  L.P. (the "Partnership") has been
established in connection with the adoption of the 1998 Class C Unit Option Plan
for the  Partnership  (the "Option  Plan").  This Loan Program  provides for the
making of loans by the  Partnership,  upon the terms and conditions  hereinafter
set forth,  to the recipients of options to purchase Class C Units  representing
limited partnership  interests in the Partnership granted pursuant to the Option
Plan.  The purpose of this Loan Program is to provide such  optionees with funds
to pay the exercise price of such options and any additional  amounts to be paid
to the  Partnership in order to comply with  applicable  federal or state income
tax withholding requirements.

     Section 2. Definitions.  As used herein, the following terms shall have the
meanings indicated:

          (a) "Accelerated  Option" shall mean any Option the  exercisability of
     which has been accelerated pursuant to Section 7 of the Option Plan.

          (b) "Fair Market Value" shall mean:

               (i)  with  respect  to  any  Traded  Securities  on any  date  of
          reference, the Closing Price on the business day immediately preceding
          such date, unless the Committee in its sole discretion shall determine
          otherwise in a fair and uniform manner. For this purpose,  the closing
          price of the Traded  Securities  on any  business day shall be: (A) if
          the Traded Securities are listed or admitted for trading on any United
          States national or  international  securities  exchange or included in
          the National  Market System of the National  Association of Securities
          Dealers Automated Quotation System ("NASDAQ"),  the last reported sale
          price of the Traded Securities on such exchange or system, as reported
          in any newspaper of general circulation;  (B) if the Traded Securities
          are quoted on NASDAQ, or any similar system of automated dissemination
          of quotations of securities prices in common use, the mean between the
          closing high bid and low asked  quotations  for such day of the Traded
          Securities  on  such  system;  (C) if  neither  clause  (A) nor (B) is
          applicable, the mean between the high bid and low asked quotations for
          the Traded  Securities as reported by the National  Quotation  Bureau,
          Incorporated if at least two securities dealers have inserted both bid
          and asked quotations for the Traded Securities on at least five of the
          ten  preceding  days;  or,  (D)  in  lieu  of  the  above,  if  actual
          transactions  in the Traded  Securities are reported on a consolidated
          transaction  reporting  system,  the last  sale  price  of the  Traded
          Securities for such day and on such system;

               (ii) with respect to any U.S. Government  Obligations on any date
          of reference,  the mean between the bid and asked  quotations for such
          U.S. Government Obligations for the business day immediately preceding
          such date as set forth in any newspaper of general circulation; and

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               (iii) with  respect to any foreign or  domestic  real or personal
          property other than Traded Securities or U.S. Government  Obligations,
          the fair market value of such  property as  determined by an appraiser
          of recognized  standing duly  qualified in the  jurisdiction  in which
          such appraiser practices.

          (c) "Fully Secured" shall mean that the Optionee shall have created in
     favor of the Partnership a perfected  security  interest in (i) the Class C
     Units  acquired  upon  exercise of the Related  Option as security for such
     portion  of the Loan  equal  to the  Margin  Loan  Amount  and  (ii)  Other
     Collateral  that  has a  Fair  Market  Value  equal  to the  amount  of the
     remaining  portion of the Loan  (including any portion  attributable to Tax
     Payments).

          (d) "Loan"  shall mean any loan  extended to an  Optionee  pursuant to
     this Loan Program.

          (e) "Loan  Date"  shall mean,  with  respect to any Loan,  the date on
     which such Loan is made by the Partnership.

          (f) "Margin Loan  Amount"  shall mean,  with  respect to any Loan,  an
     amount equal to fifty percent (50%) of the Fair Market Value as of the Loan
     Date of the Class C Units acquired upon exercise of the Related Option.

          (g) "Other  Collateral"  shall mean any property of an Optionee  other
     than Class C Units  acquired  upon  exercise  of a Related  Option  that is
     pledged to secure any portion of a Loan.

          (h)  "Partnership  Interest  Rate"  shall  mean the  rate of  interest
     payable by the  Partnership  with respect to its  revolving  line of credit
     with its primary  lender or, if the  Partnership  has no revolving  line of
     credit,  the rate of interest  payable by any affiliate of the  Partnership
     selected by the Committee with respect to such  affiliate's  revolving line
     of credit with its primary lender.

          (i) "Related  Option"  shall mean the Option with respect to which the
     proceeds of a  particular  Loan shall be used for  payment of the  exercise
     price thereunder.

          (j)  "Required  Loan  Documents"  shall  mean  (i) the  Optionee  Loan
     Application  Form, in substantially  the form of Exhibit A attached hereto,
     (ii) the Promissory Note, in  substantially  the form of Exhibit B attached
     hereto,  (iii) in the case of a Loan  pursuant to Section 3(a) hereof,  the
     Pledge  Agreement,  in substantially the form of Exhibit C attached hereto,
     covering the Class C Units  acquired upon the exercise of a Related  Option
     and any Traded Securities or U.S. Government  Obligations included as Other
     Collateral,  (iv) in the case of a Loan  pursuant  to Section  3(a) that is
     secured by Other Collateral consisting of real or personal property located
     in a foreign  jurisdiction,  the Standard Form All-Monies Legal Charge,  in
     substantially the form of Exhibit D attached hereto, and (v) in the case of
     a Loan  pursuant  to  Section  3(a)  that is  secured  by Other  Collateral
     consisting of real or personal  property  located within the United States,
     any other documentation required by the Committee, in its sole discretion,

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     to create in favor of the Partnership a perfected security interest in such
     property.

          (k)  "Tax  Payments"   shall  mean  payments  to  the  Partnership  in
     compliance  with  applicable   federal  or  state  income  tax  withholding
     requirements.

          (l) "Traded  Securities"  shall mean any securities that are listed or
     admitted  for  trading  on any  United  States  national  or  international
     securities  exchange  or  included  in the  National  Market  System of the
     National  Association  of Securities  Dealers  Automated  Quotation  System
     ("NASDAQ") or any similar system of automated dissemination of quotations
     of securities prices in common use.

          (m) "U.S.  Government  Obligations" shall mean securities that are (i)
     direct obligations of the United States of America for the payment of which
     its full faith and credit is pledged or (ii) the  obligations  of an entity
     controlled or supervised by and acting as an agency or  instrumentality  of
     the United States of America the timely payment of which is unconditionally
     guaranteed  as a full faith and credit  obligation  of the United States of
     America.

All  capitalized  terms not  otherwise  defined  herein  shall have the meanings
assigned to them in the Option Plan.

     Section 3. Loans.

          (a) The  Partnership,  upon the receipt of each of the  Required  Loan
     Documents,  properly  completed and signed by an Optionee,  shall extend to
     such  Optionee a Loan in the amount  indicated on such form (subject to the
     terms of this Section 3). The Required Loan  Documents  must be provided to
     the  Partnership  prior to or  concurrently  with such  Optionee's  written
     notice of exercise of the Related  Option.  Subject to Section  3(b) below,
     the Loan shall be made on the following terms and conditions:

               (i) the amount of the Loan may not exceed the aggregate  exercise
          price for the Related Option plus the amount of any Tax Payments;

               (ii) the amount of the Loan must be Fully Secured;

               (iii) the  principal  balance  of the Loan  shall  become due and
          payable on the fifth anniversary of the Loan Date;

               (iv) the principal balance of the Loan shall accrue interest at a
          rate equal to the  Partnership  Interest Rate in effect as of the Loan
          Date; and

               (v) accrued  interest shall be payable on the last day of each of
          the  Partnership's  fiscal  quarters  during  which  the Loan  remains
          outstanding.


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<PAGE>



          (b) In the event  that (i) any  portion  of the  Related  Option is an
     Accelerated  Option and (ii) the  Optionee was not a member of the Board at
     the time the Related Option was granted,  then the Loan may be made, at the
     discretion of the Optionee, on the following terms and conditions:

               (i) the amount of the Loan may not exceed the aggregate  exercise
          price for the Related Option plus the amount of any Tax Payments;

               (ii) the Loan may be unsecured;

               (iii) the  principal  balance  of the Loan  shall  become due and
          payable on the first anniversary of the Loan Date;

               (iv) the principal balance of the Loan shall accrue interest at a
          rate equal to the  Partnership  Interest Rate in effect as of the Loan
          Date plus two percent (2%); and

               (v) accrued  interest shall be payable on the last day of each of
          the  Partnership's  fiscal  quarters  during  which  the Loan  remains
          outstanding.

          (c) The  proceeds of the Loan may be used by the  Optionee  solely for
     (i) the payment,  whether full or partial,  of the aggregate exercise price
     of the Related  Option and (ii) the payment of any funds by the Optionee to
     the Partnership in order to comply with applicable  federal or state income
     tax withholding requirements.

          (d) The  principal  balance of the Loan may be repaid by the  Optionee
     either in cash or by the surrender of Class C Units,  owned by the Optionee
     for at least six months,  having a Fair Market Value as of the date of such
     repayment equal to such principal balance.

          (e) The  Partnership  shall not be  obligated  to make any Loan if the
     amount of such Loan is less than $25,000.

          (f) In no event shall the  Partnership  be required to make a Loan if,
     as reflected  on the  Partnership's  latest  regularly  prepared  books and
     records,  the  Partnership  does not have available  sufficient cash or the
     availability of additional borrowings under its revolving line of credit in
     a  sufficient  amount to make the Loan after taking into account all of the
     Partnership's  commitments for cash  expenditures and budgeted receipts for
     at least a one year period after the Loan Date.

     Section  4.  Compliance  with  Applicable  Laws.  It is the  intent  of the
Partnership  that this Loan Program and the Loans made hereunder comply with all
applicable laws,  including without limitation  Regulation G issued by the Board
of Governors of the Federal Reserve System.  Accordingly,  the Partnership shall
register  on  Federal  Reserve  Form FR G-1  within 30 days after the end of any
calendar  quarter  during which (i) the aggregate  amount of the Loans  extended
during such quarter equals $200,000 or more or (ii) the aggregate  amount of the
Loans  outstanding at any time during that calendar  quarter equals  $500,000 or
more. Furthermore, if the Partnership has registered on Form FR G-1, then the

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Partnership shall,  within 30 days following June 30 of every year, file Federal
Reserve Form FR G-4.

     Section 5. Administration of Loan Program; Amendments.

          (a)  This  Loan  Program  may  be  administered  by  the  Compensation
     Committee of the Board or other committee thereof as appointed by the Board
     (the "Committee"); or, if the Board so determines, by the Board and in such
     case all  references to the  Committee  shall be deemed to be references to
     the Board.  The  Committee  may from time to time amend this Loan  Program;
     provided,  however,  that  no  such  amendment  shall  apply  to any  Loans
     outstanding prior to the adoption of such amendment.

          (b) The Committee,  from time to time, may adopt rules and regulations
     for carrying out the purposes of this Loan Program.  The determinations and
     the  interpretation  and construction of any provision of this Loan Program
     by the Committee shall be final and conclusive.

          (c) Any and all decisions or  determinations of the Committee shall be
     made  either (i) by a majority  vote of the members of the  Committee  at a
     meeting or (ii) without a meeting by the written  approval of a majority of
     the members of the Committee.

     Section 6. Miscellaneous.

          (a)  The  provision  of a Loan  shall  be in  addition  to  any  other
     compensation  paid to the Optionee or other  employee  benefit plans of the
     Partnership or other benefits with respect to Optionee's  position with the
     Partnership or its  Subsidiaries.  The provision of a Loan shall not confer
     upon the Optionee the right to continue as an Employee, or interfere in any
     way with the rights of the Partnership to terminate his or her status as an
     Employee.

          (b) Neither  the members of the Board nor any member of the  Committee
     shall be liable for any act,  omission,  or determination  taken or made in
     good faith with  respect to this Loan  Program or any Loan,  and members of
     the Board and the  Committee  shall,  in  addition  to all other  rights of
     indemnification  and  reimbursement,  be  entitled to  indemnification  and
     reimbursement by the Partnership in respect of any claim,  loss, damage, or
     expense  (including  attorneys'  fees,  the  costs of  settling  any  suit,
     provided such settlement is approved by independent  legal counsel selected
     by the Partnership,  and amounts paid in satisfaction of a judgment, except
     a judgment based on a finding of bad faith) arising from such claim,  loss,
     damage,  or  expense  to the full  extent  permitted  by law and  under any
     directors' and officers'  liability or similar insurance  coverage that may
     from time to time be in effect.

          (c) The  provision  of a Loan to an  Optionee in  accordance  with the
     provisions of this Loan Program shall,  to the extent  thereof,  be in full
     satisfaction  of all claims of such Optionee  under this Loan Program.  The
     Committee may require any Optionee,  legal  representative,  heir, legatee,
     distributee  or assignee as a condition  precedent to the provision of such
     Loan,  to execute a release  and  receipt  for such Loan in such form as it
     shall determine.


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<PAGE>



          (d) All  expenses  incident  to the  administration,  termination,  or
     protection of this Loan Program,  including,  but not limited to, legal and
     accounting fees, shall be paid by the Partnership;  provided,  however, the
     Partnership  may  recover any and all  damages,  fees,  expenses  and costs
     arising out of any actions taken by the  Partnership  to enforce its rights
     under this Loan Program or any Required Loan Document.

          (e) Records of the  Partnership  shall be conclusive  for all purposes
     under this Loan Program or any Loan,  unless determined by the Committee to
     be incorrect.

          (f) The  Partnership  shall,  upon  request or as may be  specifically
     required under this Loan Program or any Required Loan Document,  furnish or
     cause to be  furnished  all of the  information  or  documentation  that is
     necessary or required by the  Committee to perform its duties and functions
     under this Loan Program or any Required Loan Document.

          (g) The Partnership  assumes no liability to any Optionee or his legal
     representatives, heirs, legatees or distributees for any act of, or failure
     to act on the part of, the Committee.

          (h) If any  provision  of  this  Loan  Program  or any  Required  Loan
     Document is held to be illegal or invalid for any reason, the illegality or
     invalidity  shall not affect the remaining  provisions of this Loan Program
     or  such  Required  Loan  Document,  but  such  provision  shall  be  fully
     severable,  and the Loan Program or Required Loan Document,  as applicable,
     shall be construed and enforced as if the illegal or invalid  provision had
     never been  included in the Loan  Program or  Required  Loan  Document,  as
     applicable.

          (i)  Whenever  any notice is  required  or  permitted  under this Loan
     Program, such notice must be in writing and personally delivered or sent by
     mail or delivery by a nationally  recognized  courier  service.  Any notice
     required or  permitted to be delivered  under any  Required  Loan  Document
     shall be  deemed  to be  delivered  on the  date on which it is  personally
     delivered,  or, if mailed,  whether actually  received or not, on the third
     Business Day after it is deposited in the United States mail,  certified or
     registered,  postage prepaid,  addressed to the person who is to receive it
     at the address that such person has previously  specified by written notice
     delivered  in  accordance  with  this  Section  6(i)  or,  if  by  courier,
     seventy-two  (72) hours after it is sent,  addressed  as  described in this
     Section 6(i). The  Partnership or the Optionee may change,  at any time and
     from time to time, by written  notice to the other,  the address that it or
     he had  previously  specified  for  receiving  notices.  Until  changed  in
     accordance  with this Loan Program,  the Partnership and the Optionee shall
     specify as its and his address for receiving  notices the address set forth
     in this Loan  Program or any  Required  Loan  Document to which such notice
     relates.

          (j) Any  person  entitled  to notice  under  this Loan  Program or any
     Required Loan Document may waive such notice.

          (k) This Loan Program  shall be binding upon the  Optionee,  his legal
     representatives,  heirs,  legatees and distributees,  upon the Partnership,
     its  successors,  and assigns,  and upon the Board,  the  Committee and its
     successors.


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<PAGE>



          (l) The titles and headings of Sections  are included for  convenience
     of reference only and are not to be considered in construction of this Loan
     Program's provisions.

     Effective Date: May 5, 1998.










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<PAGE>



                                    EXHIBIT A

                         OPTIONEE LOAN APPLICATION FORM


1. Name of Optionee:

2. Number of Class C Units Subject to Option:

3. Number of Class C Units being acquired pursuant to exercise of such Option:

4. Exercise price per Class C Unit for such Option:

5. Amount of Loan requested:

6. Is the above-referenced Option an Accelerated Option? Yes No

7. If the above-referenced  Option is an Accelerated Option, then the Loan shall
be made pursuant to which section of the Loan Program (designate one):

          Section 3(a)        Section 3(b)

                                            OPTIONEE:



Date:
                                   Print Name:

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<PAGE>



                                    EXHIBIT B

                                 PROMISSORY NOTE

$_________                                                 _____________, 199__

     ____________________________________   ("Maker"),   for   value   received,
promises and agrees to pay, as herein provided,  to the order of Hallwood Energy
Partners,  L.P., a Delaware limited partnership ("Payee"), at such address or to
such bank account as Payee may direct,  in lawful money of the United  States of
America,  the principal sum of  _______________________________________  Dollars
($_________).  This note ("Note") is issued under the terms of that certain 1998
Class C Unit Option Plan Loan Program for Hallwood Energy  Partners,  L.P. as in
effect on the date hereof (the "Loan Program").

     1. Payment of Principal  and Interest.  (a) The  principal  balance of this
Note and all accrued  and unpaid  interest  thereon  shall be due and payable on
______________, _____ (the "Maturity Date"); provided, however, that if such day
is not a day on which banks are open for business in the State of ___________ (a
"Business  Day"),  then  such  payment  shall  be due on the  Business  Day next
succeeding the Principal Payment Date. The principal balance of this Note may be
repaid either in cash or by the surrender of certificates  representing  Class C
Units of limited  partnership  interest in Payee owned by the Maker for at least
six months  having a fair  market  value  equal to such  principal  balance  (as
determined in accordance with the Loan Program).

     (b) The  principal  balance  outstanding  from time to time under this Note
(after  giving effect to all  adjustments  thereto made pursuant to the terms of
this Note)  shall bear  interest  at a rate of  __________  percent  (____%) per
annum. In no event shall the interest rate payable  hereunder exceed the maximum
rate of  nonusurious  interest  allowed from time to time by applicable law (the
"Highest   Lawful   Rate").   Maker   shall   pay  to   Payee,   commencing   on
_________________  and on the last  day of each  succeeding  three-month  period
until the  Maturity  Date,  all accrued and unpaid  interest on the  outstanding
principal  balance as of such  date,  unless  such day is not a Business  Day in
which case such payment  shall be due on the Business Day next  succeeding  such
day.

     2. Maximum  Interest  Rate.  (a) It is the  intention of Maker and Payee to
conform strictly to applicable usury laws. Accordingly,  if the interest payable
on  this  Note  would  be  usurious  under   applicable   law,  in  that  event,
notwithstanding  anything to the contrary herein,  it is agreed as follows:  (i)
the aggregate of all  consideration  that constitutes  interest under applicable
law that is taken, reserved, contracted for, charged or received under this Note
shall under no  circumstances  exceed the maximum amount of interest  allowed by
applicable  law,  and  any  excess  shall  be  canceled  automatically  and,  if
theretofore  paid,  shall be credited on this Note by the holder  hereof (or, to
the  extent  that this Note  shall  have been or would  thereby be paid in full,
refunded  to  Maker);  and  (ii) in the  event  that  maturity  of this  Note is
accelerated  for any  reason,  or in the  event  of any  required  or  permitted
prepayment,  then such consideration that constitutes interest may never include
more than the maximum amount allowed by applicable law, and excess interest,  if
any,  provided for in this Note or otherwise shall be canceled  automatically as
of the date of such  acceleration or prepayment and, if theretofore  paid, shall
be credited on this Note (or, to the extent

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<PAGE>



that this Note shall have been or would  thereby  be paid in full,  refunded  to
Maker).  All sums paid or agreed to be paid to the  holder  hereof  for the use,
forbearance or detention of sums included in the amounts owing to such holder by
Maker shall, to the extent permitted by applicable law, be amortized,  prorated,
allocated and spread throughout the full term of this Note until payment in full
so that the rate or amount of  interest  on  account  of  indebtedness  does not
exceed the  applicable  usury  ceiling,  if any. As used in this Note,  the term
"applicable law" shall mean the law of the State of Delaware.

     (b) If at  maturity  or final  payment  of this  Note the  total  amount of
interest paid or accrued  under the foregoing  provisions is less than the total
amount of interest  which would have accrued if an interest rate per annum equal
to the Interest  Rate had at all times been in effect,  then Maker agrees to pay
to Payee,  to the  extent  allowed by  applicable  law,  an amount  equal to the
difference  between (a) the lesser of (i) the amount of interest that would have
accrued on this Note if the Highest  Lawful Rate had at all times been in effect
or (ii) the amount of interest  which would have accrued if an interest rate per
annum equal to the  Interest  Rate had at all times been in effect,  and (b) the
amount of interest accrued in accordance with the other provisions of this Note.

     3. Waiver.  Maker  expressly  waives  demand and  presentment  for payment,
notice of nonpayment,  protest, notice of protest, notice of dishonor, notice of
intent to accelerate  the maturity  hereof,  notice of the  acceleration  of the
maturity hereof,  bringing of suit and diligence in taking any action to collect
amounts  called for  hereunder  and in the  handling of  securities  at any time
existing in connection herewith.

     4.  Amendments.  Any term or provision of this Note and any  obligation  of
Maker hereunder or with respect hereto, may be changed or modified, partially or
completely,  or  noncompliance  may be  consented to or  authorized,  by written
agreement between Maker and Payee.

     5.  Events  of  Default.  The  occurrence  and  continuance  of  any of the
following  events shall be considered an "Event of Default" for purposes of this
Note:  (a) if Maker uses the proceeds of this Note for any purpose other than in
accordance  with the terms of the Loan  Program;  (b)  default  is made (and not
cured within 10 calendar  days) in the payment of principal or interest  hereon,
(c) any involuntary case or other  proceeding  shall be commenced  against Maker
that seeks liquidation, reorganization or other relief with respect to it or its
debts or other liabilities under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the  appointment  of a trustee,  receiver,
liquidator  or custodian  unless  dismissed  or stayed  within 90 days after the
institution  thereof (provided that upon  ineffectiveness of any stays, an Event
of Default shall exist);  and (d) Maker shall commence a voluntary case or other
proceeding seeking  liquidation,  reorganization or other relief with respect to
itself or its debts or other  liabilities  under any  bankruptcy,  insolvency or
other  similar law now or  hereafter in effect or seeking the  appointment  of a
trustee, receiver, liquidator,  custodian or other similar official with respect
to the Maker,  or shall consent to any such relief or to the  appointment of, or
taking  possession  by,  any  such  official  in an  involuntary  case or  other
proceeding  commenced  against  it, or shall make a general  assignment  for the
benefit of  creditors  or shall fail  generally  or shall  admit in writing  its
inability  to pay its  debts  generally  as they  become  due or shall  take any
corporate action to authorize or effect any of the foregoing.

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<PAGE>



     6.  Remedy.  Upon the  occurrence  of any  Event  of  Default,  the  entire
principal  amount of the Note then  outstanding  together with interest  accrued
thereon shall become immediately due and payable, all without written notice and
without presentment, demand, protest, notice of protest or dishonor or any other
notice of default of any kind, all of which are hereby  expressly  waived by the
Maker.

     7. Costs and  Attorneys'  Fees.  If default is made in the  payment of this
Note at maturity  (regardless  of how its maturity may be brought about) and the
same is placed  in the hands of an  attorney  for  collection,  or suit is filed
hereon,   or  proceedings   are  had  in  bankruptcy,   probate,   receivership,
reorganization, arrangement, or other judicial proceedings for the establishment
or collection of any amount called for hereunder, or any amount payable or to be
payable hereunder is collected through any such proceedings, Maker agrees to pay
to the owner  and  holder of this Note  reasonable  attorneys'  fees and  costs,
including the fees and costs incurred in any appeals,  and any  collection  fees
incurred in collection of this Note.

     8.  Security.  The payment and  performance  of this Note is secured by the
security  interest  described  by that certain  Pledge  Agreement by and between
Maker and Payee.

     9. Governing Law. This Note and the rights and obligations  hereunder shall
be governed by and  construed  and enforced in  accordance  with the laws of the
State of Delaware.




                                 [Name of Maker]

                                        3

<PAGE>



                                    EXHIBIT C

                                PLEDGE AGREEMENT

     This PLEDGE  AGREEMENT  (this  "Agreement"),  dated as of  _______________,
19___, is entered into by and between ______________________________ ("Pledgor")
and  Hallwood  Energy  Partners,  L.P.,  a  Delaware  limited  partnership  (the
"Partnership"),  in order to secure the payment of the indebtedness  hereinafter
referred to of Pledgor to the Partnership.

                                 R E C I T A L S

     As a condition to the Partnership providing a loan to Pledgor in the amount
of $_________,  which loan is evidenced by a Promissory  Note dated of even date
herewith,  Pledgor has agreed to pledge to the Partnership all of the securities
that are described on Exhibit A hereto (the "Pledged Securities").


                                A G R E E M E N T

     NOW,  THEREFORE,  in  consideration of the foregoing and for other good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereto agree as follows:

     Section  1.  Definitions.  Capitalized  terms  used  herein  shall have the
meaning specified herein.

     Section 2. Pledge. Pledgor hereby pledges, assigns,  transfers and delivers
to the  Partnership,  and  hereby  grants a  security  interest  (the  "Security
Interest") in, the following (the  "Collateral"):  the Pledged  Securities,  the
certificates  representing  such Pledged  Securities  and all  dividends,  cash,
securities,  instruments  and other property from time to time paid,  payable or
otherwise  distributed  in  respect  of or in  exchange  for  any or all of such
Pledged Securities.

     Section 3. Secured  Obligations.  The Security Interest shall secure, under
the circumstances  set forth herein,  the Secured  Obligations.  For purposes of
this Agreement,  the term "Secured Obligations" shall mean the following (i) the
due and punctual  payment and  performance of the Promissory  Note,  dated as of
_______________,  made by Pledgor and payable to the order of the Partnership in
the principal amount of $_______________ (the "Note") and (ii) the reimbursement
of all costs incurred by the  Partnership  to obtain,  preserve and enforce this
Agreement,  collect  the Secured  Obligations  and  maintain  and  preserve  the
Collateral, including without limitation the Partnership's reasonable attorneys'
fees, disbursements and legal expenses.

     Section 4. Delivery of Collateral. Upon the execution hereof, Pledgor shall
deliver to the  Partnership  the  certificates  representing  or evidencing  the
Collateral,  in suitable form for transfer by delivery,  or  accompanied by duly
executed  instruments  of  transfer  or  assignment  in  blank,  all in form and
substance reasonably satisfactory to the Partnership. Upon the occurrence and

                                        1

<PAGE>



during the continuance of an Event of Default,  the  Partnership  shall have the
right, at any time in its discretion and without notice to Pledgor,  to transfer
to or to register in the name of the Partnership any or all of the Collateral.

     Section 5.  Representations and Warranties.

     Pledgor represents and warrants as follows:

               (i) The Security Interest  constitutes a valid and, upon delivery
          of the certificates evidencing the Pledged Securities, first perfected
          security interest in all of the Collateral for payment and performance
          of the Secured Obligations.

               (ii) The  Collateral  is owned by  Pledgor  free and clear of any
          lien, claim or encumbrance except for the Security Interest.

All representations and warranties of Pledgor contained herein shall survive the
execution,  delivery and performance of this Agreement until termination of this
Agreement under Section 16.

     Section 6.  Further  Assurances.  Pledgor  agrees that at any time and from
time to time, at Pledgor's  expense,  Pledgor will promptly  execute and deliver
all further  instruments  and  documents,  and take all further  action that the
Partnership may reasonably request, in order to perfect and protect the Security
Interest  granted or purported to be granted hereby or to enable the Partnership
to exercise  and enforce the rights and remedies  hereunder  with respect to any
Collateral.

     Section 7.  Releases of  Collateral.  Pledgor  shall not sell or  otherwise
dispose of the Collateral,  or any part thereof or any interest therein.  If the
Collateral,  or any part thereof,  is sold or otherwise disposed of in violation
of these provisions,  the Security Interest of the Partnership shall continue in
such  Collateral  or  any  part  thereof  notwithstanding  such  sale  or  other
disposition, and Pledgor will deliver any proceeds thereof to the Partnership to
be held as Collateral hereunder.

     Section  8.   Partnership   Appointed   Attorney-in-Fact.   Pledgor  hereby
irrevocably  appoints the Partnership as Pledgor's  attorney-in-fact,  with full
authority in the place and stead of Pledgor and in its name or  otherwise,  from
time to time in the Partnership's  discretion, to take any action and to execute
any instrument that the  Partnership may deem reasonably  necessary or advisable
to accomplish the purposes of this Agreement,  including, without limitation, to
receive,   endorse  and  collect  all   instruments   made  payable  to  Pledgor
representing any dividend,  interest payment or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same, when
and to the extent permitted by this Agreement.

     Section 9.  Partnership  May Perform.  Upon the  occurrence  and during the
continuance of an Event of Default (including an Event of Default resulting from
a failure  to perform  any  agreement  contained  herein),  if Pledgor  fails to
perform any agreement  contained herein, the Partnership may itself perform,  or
cause  performance  of, such  agreement,  and the  expenses  of the  Partnership
incurred in connection therewith shall be payable by Pledgor under Section 12.


                                        2

<PAGE>



     Section 10.  Reasonable  Care. The Partnership  shall have an obligation to
exercise reasonable care with respect to Collateral in its possession; provided,
however,  that the Partnership shall be deemed to have exercised reasonable care
if the Collateral is accorded treatment  substantially  comparable to that which
the  Partnership  accords  its  own  property  or  treatment   substantially  in
accordance  with  actions   requested  by  Pledgor  in  writing   (although  the
Partnership  shall not be  obligated  to comply  with any such  requests  and no
failure to do so shall be deemed to be a failure to exercise reasonable care).

     Section 11. Events of Default: Remedies Upon Default. An "Event of Default"
hereunder  occurs if Pledgor fails to pay any amount when due under the Note and
the Partnership accelerates the payment of the principal and interest thereunder
such that such  Secured  Obligations  shall become  immediately  due and payable
(herein called an "Event of Default").

     If upon or after the  occurrence of any Event of Default,  the  Partnership
elects to exercise  remedies under this  Agreement  (the  occurrence of any such
event shall be referred  to as an  "Acceleration"),  then upon thirty (30) days'
advance notice to the Pledgor:

               (a)  The   Partnership  may  exercise  (in  compliance  with  all
          applicable securities laws) in respect of the Collateral,  in addition
          to  other  rights  and  remedies  provided  for  herein  or  otherwise
          available to it, all the rights and remedies of a secured  party after
          default  under the Uniform  Commercial  Code in effect in the State of
          ____________  at that  time,  and the  Partnership  may also,  without
          notice  except as specified  below,  sell the  Collateral  or any part
          thereof  in one or more  parcels  at public or  private  sale,  at any
          exchange,  over  the  counter  or  at  the  Partnership's  offices  or
          elsewhere,  for cash,  on credit or for future  delivery,  and at such
          price or prices and upon such other terms as the  Partnership may deem
          commercially  reasonable  or  otherwise in such manner as necessary to
          comply  with  applicable  federal  and  state  securities  laws.  Upon
          consummation of any such sale, the Partnership shall have the right to
          assign,  transfer and deliver to the  purchaser or  purchasers  at any
          such sale and such purchasers shall hold the property sold absolutely,
          free  from any  claim or right  on the part of  Pledgor,  and  Pledgor
          hereby  waives  (to  the  extent  permitted  by  law)  all  rights  of
          redemption,  stay or  appraisal  that it now has or may at any time in
          the  future  have  under any rule of law or statute  now  existing  or
          hereafter enacted.

     Pledgor  agrees that the  Partnership  shall not be required to register or
qualify any of the Collateral under applicable state or federal  securities laws
in  connection  with any  such  sale if the sale is  effected  in a manner  that
complies with all  applicable  federal and state  securities  laws or exemptions
therefrom.  The Partnership shall be authorized at any such sale (if it deems it
advisable to do so) to restrict the prospective bidders or purchasers to persons
who will  represent and agree that they are  purchasing the Collateral for their
own  account  for  investment  and not with a view to the  distribution  or sale
thereof.  In the event that any such Collateral is sold at private sale, Pledgor
agrees that if such  Collateral is sold for a price that the Partnership in good
faith believes to be reasonable under the circumstances then existing,  then (a)
the sale shall be deemed to be  commercially  reasonable  in all  respects,  (b)
Pledgor shall not be entitled to a credit against the Secured  Obligations in an
amount in excess of the purchase price, and (c) the Partnership  shall not incur
any   liability  or   responsibility   to  Pledgor  in   connection   therewith,
notwithstanding  the possibility  that a  substantially  higher price might have
been realized at a public sale. Pledgor hereby waives any claims against the

                                        3

<PAGE>



Partnership  arising by reason of the fact that the price at that the Collateral
may have been sold at such  private sale was less than the price that might have
been obtained at a public sale or was less than the Secured Obligations, even if
the  Partnership  accepts  the  first  offer  received  and does not  offer  the
Collateral to more than one offeree (other than the  Partnership or an affiliate
of the Partnership),  unless such sale was not commercially reasonable under the
circumstances.

     To the extent  notice of sale shall be  required  by law,  the  Partnership
shall give  Pledgor at least ten (10) days' (or such  longer  period as shall be
specified by applicable laws) notice of the time and place of any public sale or
the time after which any private sale is to be made,  which Pledgor agrees shall
constitute  commercially  reasonable   notification.   At  any  such  sale,  the
Partnership, to the extent permitted by law, may bid (which bid may be, in whole
or in part, in the form of cancellation of Secured Obligations) for and purchase
for the account of the Partnership the whole or any part of the Collateral.  The
Partnership shall not be obligated to make any sale of Collateral  regardless of
notice of sale  having  been given.  The  Partnership  may adjourn any public or
private  sale from  time to time by  announcement  at the time and  place  fixed
therefor,  and such sale may,  without further  notice,  be made at the time and
place to which it was so adjourned. If sale of all or any part of the Collateral
is made on credit or for future delivery, the Collateral so sold may be retained
by the  Partnership  until the sale price is paid by the purchaser or purchasers
thereof,  but the  Partnership  shall not incur any  liability  in case any such
purchaser or purchasers shall fail to take up and pay for the Collateral so sold
and, in case of any such failure,  such  Collateral  may be sold again upon like
notice.  Pledgor  agrees  that  any  sale  of the  Collateral  conducted  by the
Partnership  in accordance  with the foregoing  provisions of this Section 11(a)
shall  be  deemed  to  be a  commercially  reasonable  sale  under  the  Uniform
Commercial Code as in effect in the State of ____________ from time to time.

     As an alternative to exercising the power of sale herein conferred upon it,
the  Partnership may proceed by a suit or suits at law or in equity to foreclose
the security  interest  granted under this Agreement and to sell the Collateral,
or any portion thereof, pursuant to a judgment or decree of a court or courts of
competent jurisdiction.

               (b) Any cash held by the  Partnership  as Collateral and all cash
          proceeds  received  by the  Partnership  in  respect  of any  sale of,
          collection  from,  or  other  realization  upon all or any part of the
          Collateral  (i) prior to the  occurrence of an  Acceleration  shall be
          held by the Partnership as collateral for the Note, and (ii) following
          the occurrence of an  Acceleration  may be held by the  Partnership as
          Collateral  and/or then or at any time thereafter  applied as follows:
          (x) first, to the payment to the Partnership of the costs and expenses
          of retaking,  holding and preparing for sale of the Collateral and any
          other fees, expenses, claims, demands, losses, judgments,  damages and
          liabilities  arising out of or related to any loan document  which are
          payable to the Partnership  pursuant to Section 12, and (y) second, to
          the Partnership  for  application  against or on account of all or any
          part of the Notes.

               (c) Any  surplus  of  such  cash  or  cash  proceeds  held by the
          Partnership and remaining after payment in full of all the Notes shall
          be reassigned and redelivered as provided in Section 16 hereof.

                                        4

<PAGE>



     Section 12. Expenses. The Partnership shall be entitled to receive from any
proceeds  of the  Collateral,  the  amount of any and all  reasonable  expenses,
including  the fees and  expenses  of its  counsel and of any experts and agents
that the Partnership may incur in connection with (i) the administration of this
Agreement, (ii) the custody or preservation of, or the sale of, collection from,
or  other  realization  upon,  any of the  Collateral,  (iii)  the  exercise  or
enforcement  of any of the  rights  of the  Partnership  hereunder,  or (iv) the
failure by Pledgor to perform or observe any of the provisions hereof.

     Section  13.  Security  Interest  Absolute.  All rights of the  Partnership
hereunder,  the interest,  and all  obligations of Pledgor  hereunder,  shall be
absolute and unconditional irrespective of:

               (i) any lack of  validity  or  enforceability  of the Note or the
          Secured  Obligations or any other agreement or instrument  relating to
          the Note or the Secured Obligations;

               (ii) any change in the time, manner or place of payment of, or in
          any other term of, the Note or the Secured Obligations, or any renewal
          or  extension  of the Note or the  Secured  Obligations  or any  other
          amendment  or  waiver of or any  consent  to any  departure  from this
          Agreement or any other agreement or instrument;

               (iii) any sale,  exchange,  release or nonperfection of any other
          collateral,  or any release of any  guarantor or any person  liable in
          any manner for the collection of the Note or the Secured  Obligations,
          or any  amendment  or waiver of or  consent to or  departure  from any
          guaranty, for the Note or the Secured Obligations; or

               (iv) any other  circumstance  that might  otherwise  constitute a
          defense  available  to, or a discharge  of,  Pledgor in respect of the
          Note or the Secured Obligations or in respect of this Agreement.

     Section 14. Amendments and Waivers. No amendment or waiver of any provision
of this Agreement nor consent to any departure by Pledgor  herefrom shall in any
event be  effective  unless  the same  shall be in  writing  and  signed  by the
Partnership and Pledgor, and then such waiver or consent shall be effective only
for the specific purpose for which given.

     Section 15. Time is of the Essence; No Waiver:  Cumulative  Remedies.  Time
and  exactitude of each of the terms,  obligations,  covenants and conditions of
this Agreement are hereby declared to be of the essence.  No failure on the part
of the Partnership to exercise, and no delay in exercising,  any right, power or
remedy  hereunder  shall  operate as a waiver  thereof,  nor shall any single or
partial exercise of any such right, power or remedy by the Partnership  preclude
any other or further exercise thereof or the exercise of any other right,  power
or remedy.  All remedies  hereunder are  cumulative and are not exclusive of any
other remedies provided by law.

     Section 16. Termination. This Agreement shall terminate upon the payment in
full of the Secured  Obligations.  Upon such termination,  the Partnership shall
reassign and redeliver (or cause to be reassigned and redelivered) to Pledgor,

                                        5

<PAGE>



or to such person or persons as Pledgor  shall  designate  or to whomever may be
lawfully  entitled  to  receive  such  surplus,  against  receipt,  such  of the
Collateral  (if any) as shall  not have been sold or  otherwise  applied  by the
Partnership  pursuant  to the  terms  hereof  and  shall  still  be  held  by it
hereunder,  together with  appropriate  instruments of reassignment and release.
Any  such  reassignment  shall  be  without  recourse  upon or  warranty  by the
Partnership and at the expense of Pledgor.

     Section 17. Addresses for Notices.  Any notice or communication to be given
or made hereunder shall be in writing  (including  facsimile  communication) and
may be given or made  personally  or by first class  letter,  telecopy,  courier
telex or tested telex, telegram or cable (confirmed,  in the case of a telecopy,
telex, telegram or cable, by a letter delivered personally within, or dispatched
by first class mall within,  twenty-four hours of the dispatch of such telecopy,
telex, telegram or cable) and shall be effective when actually received. For the
purposes hereof,  the address of the Pledgor shall be address  maintained in the
records  of the  Partnership  (until  notice  of a  change  thereof  is given as
provided in this Section 17), and the address of the  Partnership  (until notice
of a change  thereof  is given  as  provided  in this  Section  17)  shall be as
follows:





     Section 18. Continuing Security Interest; Assignments. This Agreement shall
create a continuing  security interest in the Collateral and shall (i) remain in
full force and effect  until  termination  as  provided  in Section  16, (ii) be
binding upon  Pledgor,  the  Partnership  and their  respective  successors  and
assigns,  and (iii)  inure,  together  with the rights,  powers and  remedies of
Pledgor  and  the  Partnership  hereunder,   to  the  benefit  of  Pledgor,  the
Partnership and their  respective  successors,  transferees and assigns,  as the
case may be.

     Section 19. Governing Law. This Agreement and the rights and obligations of
the parties hereto shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware.

         Section 20.  Severability.  Wherever  possible,  each provision of this
Agreement  shall  be  interpreted  in such  manner  as to be  effective.  If any
provisions of this  Agreement or any lien,  security  interest or other right of
the Partnership hereunder shall be held to be invalid,  illegal or unenforceable
under applicable law, such invalidity,  illegality or unenforceability shall not
affect any other provision herein or any lien,  security interest or other right
granted hereby.


                                        6

<PAGE>



     IN WITNESS WHEREOF, the parties hereto have executed this Agreement,  as of
the date first above written.

                         PARTNERSHIP:

                         HALLWOOD ENERGY PARTNERS, L.P.
                         By: HEPGP Ltd., its general partner
                         By: Hallwood GP, Inc., its general partner


                          By:
                          Name:
                          Title:___

                          PLEDGOR:


                                    -
                          Print Name:

                                        7

<PAGE>


                                    Exhibit A


                               Pledged Securities



                         Record Owner      Number of
Title of Securities       and Address      Shares or Units    Certificate No.


<PAGE>