<PAGE>   1
                                                                    EXHIBIT 10.1


--------------------------------------------------------------------------------

                          PURCHASE AND SALE AGREEMENT


                                    between


                     THE HOUSTON EXPLORATION COMPANY, INC.

                                      and


                           KEYSPAN NATURAL FUEL, LLC





                          Dated as of January 1, 1997

--------------------------------------------------------------------------------



<PAGE>   2
                               TABLE OF CONTENTS

<TABLE>
                                                                          Page
                                                                          ----
<S>      <C>                                                               <C>
1.       Purchase and Sale  . . . . . . . . . . . . . . . . . . . . . . . . 1
                                                                            
2.       The Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
         2.1     Leases and Wells . . . . . . . . . . . . . . . . . . . . . 1
         2.2     Incidental Rights  . . . . . . . . . . . . . . . . . . . . 1
         2.3     Excluded Assets  . . . . . . . . . . . . . . . . . . . . . 2
                                                                            
3.       Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                                                                            
4.       Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                                                                            
5.       Apportionment of Taxes and Production Revenues and Expenses  . . . 2
                                                                            
6.       Buyer's Representations and Warranties . . . . . . . . . . . . . . 3
         6.1     Existence  . . . . . . . . . . . . . . . . . . . . . . . . 3
         6.2     Power and Authority  . . . . . . . . . . . . . . . . . . . 3
         6.3     Authorization  . . . . . . . . . . . . . . . . . . . . . . 3
         6.4     Execution and Delivery . . . . . . . . . . . . . . . . . . 3
         6.5     Securities Laws  . . . . . . . . . . . . . . . . . . . . . 3
         6.6     Brokers' Fee . . . . . . . . . . . . . . . . . . . . . . . 3
                                                                            
7.       Seller's Representations and Warranties  . . . . . . . . . . . . . 3
         7.1     Existence  . . . . . . . . . . . . . . . . . . . . . . . . 3
         7.2     Power and Authority  . . . . . . . . . . . . . . . . . . . 4
         7.3     Authorization  . . . . . . . . . . . . . . . . . . . . . . 4
         7.4     Execution and Delivery . . . . . . . . . . . . . . . . . . 4
         7.5     Brokers' Fee . . . . . . . . . . . . . . . . . . . . . . . 4
         7.6     Reserve Report . . . . . . . . . . . . . . . . . . . . . . 4
         7.7     Liens  . . . . . . . . . . . . . . . . . . . . . . . . . . 5
         7.8     Title  . . . . . . . . . . . . . . . . . . . . . . . . . . 6
         7.9     Preferential Purchase Rights and Consents  . . . . . . . . 6
         7.10    No Prepayments . . . . . . . . . . . . . . . . . . . . . . 6
         7.11    Gas Balancing  . . . . . . . . . . . . . . . . . . . . . . 7
         7.12    Leases . . . . . . . . . . . . . . . . . . . . . . . . . . 7
         7.13    Operations in Progress . . . . . . . . . . . . . . . . . . 7
         7.14    Hydrocarbon Sales Contracts  . . . . . . . . . . . . . . . 7
         7.15    Proceeds of Production . . . . . . . . . . . . . . . . . . 7
         7.16    Material Contracts . . . . . . . . . . . . . . . . . . . . 7
         7.17    Bills in the Ordinary Course . . . . . . . . . . . . . . . 7
         7.18    Legal Proceedings  . . . . . . . . . . . . . . . . . . . . 7
</TABLE>





                                      -ii-
<PAGE>   3
<TABLE>
<S>      <C>                                                                <C>
         7.19    Compliance with Laws . . . . . . . . . . . . . . . . . . .  8
         7.20    Environmental Matters  . . . . . . . . . . . . . . . . . .  8
         7.21    Payment of Taxes . . . . . . . . . . . . . . . . . . . . .  8
         7.22    Tax Partnerships . . . . . . . . . . . . . . . . . . . . .  8
         7.23    Other Tax Matters  . . . . . . . . . . . . . . . . . . . .  8
         7.24.   Condition  . . . . . . . . . . . . . . . . . . . . . . . . 10
                                                                            
8.       Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
                                                                            
9.       Covenants  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
         9.1     Cooperation and Access . . . . . . . . . . . . . . . . . . 10
         9.2     Insurance  . . . . . . . . . . . . . . . . . . . . . . . . 10
         9.3     Subsequent Consents  . . . . . . . . . . . . . . . . . . . 10
                                                                            
10.      No Conditions to Closing . . . . . . . . . . . . . . . . . . . . . 10
                                                                            
11.      Closing  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
         11.1    Assignment and Option  . . . . . . . . . . . . . . . . . . 10
         11.2    Payment of Purchase Price  . . . . . . . . . . . . . . . . 11
         11.3    Management Agreement . . . . . . . . . . . . . . . . . . . 11
         11.4    Non-Foreign Ownership Certificate  . . . . . . . . . . . . 11
         11.5    Additional Instruments . . . . . . . . . . . . . . . . . . 11
                                                                            
12.      Post-Closing Matters . . . . . . . . . . . . . . . . . . . . . . . 11
         12.1    Files and Records  . . . . . . . . . . . . . . . . . . . . 11
         12.2    Sales Taxes and Recording Fees . . . . . . . . . . . . . . 11
         12.3    Purchase Price Adjustments for Defective Interests . . . . 11
         12.4    Purchase Price Adjustment for Exercised Preferential 
                 Purchase Rights and Failure to Obtain Consents . . . . . . 12
         12.5    Allocation of Seller's Interest in Production  . . . . . . 13
                                                                            
13.      Apportionment of Liabilities and Obligations . . . . . . . . . . . 13
         13.1    Buyer  . . . . . . . . . . . . . . . . . . . . . . . . . . 13
         13.2    Seller . . . . . . . . . . . . . . . . . . . . . . . . . . 13
                                                                            
14.      Indemnification  . . . . . . . . . . . . . . . . . . . . . . . . . 13
         14.1    Buyer's Indemnification of Seller  . . . . . . . . . . . . 13
         14.2    Seller's Indemnification of Buyer  . . . . . . . . . . . . 14
         14.3    Third Party Claims . . . . . . . . . . . . . . . . . . . . 14
                                                                            
15.      Miscellaneous  . . . . . . . . . . . . . . . . . . . . . . . . . . 15
         15.1    Further Assurances . . . . . . . . . . . . . . . . . . . . 15
         15.2    Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 15
         15.3    Notices  . . . . . . . . . . . . . . . . . . . . . . . . . 15
         15.4    Survival . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>





                                     -iii-
<PAGE>   4
<TABLE>
         <S>     <C>                                                       <C>
         15.5    Confidentiality  . . . . . . . . . . . . . . . . . . . . . 15
         15.6    Assignment . . . . . . . . . . . . . . . . . . . . . . . . 16
         15.7    Binding Effect . . . . . . . . . . . . . . . . . . . . . . 16
         15.8    Complete Agreement . . . . . . . . . . . . . . . . . . . . 16
         15.9    Knowledge  . . . . . . . . . . . . . . . . . . . . . . . . 16
         15.10   Governing Law  . . . . . . . . . . . . . . . . . . . . . . 16
         15.11   Counterparts . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>


                                    EXHIBITS

<TABLE>
<S>            <C>
Exhibit A      Leases - Part 1:  Oklahoma
                        Part 2:  Texas
                        Part 3:  West Virginia
              
              
Exhibit B      Wells (including WI, NRI, producing formation)
              
Exhibit C      Form of Assignment of Oil and Gas Leases with Reservation of 
               Production Payment
              
Exhibit D      Form of Option to Purchase Oil and Gas Interests
              
Exhibit E      Form of Management Agreement and Memorandum of Management 
               Agreement for recording purposes
              
Exhibit F      Form of Certificate of Non-Foreign Ownership
              
Exhibit G      Reserve Report prepared by Miller & Lenz, Ltd. as of 
               December 31, 1996
</TABLE>





                                      -iv-
<PAGE>   5
                          PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement ("Agreement"), dated as of January 1, 1997, is
between THE HOUSTON EXPLORATION COMPANY, INC., a Delaware corporation
("Seller") and KEYSPAN NATURAL FUEL, LLC, a Delaware limited liability company
("Buyer").

                                    RECITALS

         A.      Seller is the owner of certain oil and gas leasehold interests
in the states of Texas, West Virginia and Oklahoma, as more specifically
described below in Article 2 (the "Assets"); and

         B.      Seller desires to sell and Buyer desires to purchase the
Assets pursuant to the terms and conditions of this Agreement.

                                   AGREEMENT

         IN CONSIDERATION of the reservation of the"Production Payment"
(defined below) and "Reversionary Interest" (defined below) to be reserved by
Seller and the grant of the "Option" (defined below), and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller and Buyer agree as follows:

         1.      Purchase and Sale.  Seller agrees to convey the Assets to
Buyer and Buyer agrees to purchase the Assets from Seller, all pursuant to the
terms and conditions of this Agreement.  Seller will convey the Assets subject
to (i) the reservation by Seller of a production payment (the "Production
Payment"), reversionary interest ("Reversionary Interest") and other
reservations and obligations as specifically set forth in the Assignment of Oil
and Gas Leases With Reservation of Production Payment in a form substantially
similar to Exhibit C (the "Assignment"), and (ii) the Option To Purchase Oil
and Gas Interests to be granted to Seller at Closing in a form substantially
similar to Exhibit D (the "Option").

         2.      The Assets.  The "Assets" shall be all of the following:

                 2.1      Leases and Wells.  All of Seller's right, title and
interest in and to the oil and gas leases described in Exhibit A, including any
royalty, overriding royalty or other interests owned by Seller in such leases,
but insofar and only insofar as said leases and other interests cover (i) the
lands described in Exhibit A and (ii) the zone, horizon or interval described
in Exhibit B for each of the wells described in Exhibit B (the above described
interest in such leases being herein called the "Leases" and the above
described wells being herein called the "Wells");

                 2.2      Incidental Rights.  All of Seller's right, title and
interest in and to the following, insofar and only insofar as same are
attributable to the Leases and the Wells:

                 (a)      Unitization and Pooling Agreements.  All presently
         existing and valid oil, gas or mineral unitization, pooling, operating
         and communitization agreements, declarations and





                                      -1-
<PAGE>   6
         orders affecting the Leases and Wells, and in and to the properties
         covered and the units created thereby (the "Unitization and Pooling
         Agreements");

                 (b)      Personal Property.  The personal property and
         fixtures that are appurtenant to the Leases, or the Wells, or the
         Units, including all wells, casing, tubing, pumps, separators, tanks,
         lines and other personal property and oil field equipment on such
         Leases (the "Personal Property");

                 (c)      Agreements.  All presently existing and valid gas
         sales, purchase, gathering and processing contracts and operating
         agreements, joint venture agreements, partnership agreements, rights
         of way, easements, permits, surface leases and other contracts,
         agreements and instruments (the "Agreements").

Seller shall remain co-owners of any Unitization and Pooling Agreements,
Personal Property and Agreements to the extent they pertain to any property or
formation owned by Seller that is not exclusively part of, or applicable to,
the Wells or Leases.

                 2.3      Excluded Assets. The Assets do not include, and
Seller does not intend to convey, any of Seller's right, title or interest in
and to those interests set forth in Sections 2.2(a), (b) and (c), to the extent
such interests pertain to any property owned by Seller that is not associated
with the Leases or Wells.  Notwithstanding the provisions of Section 2.2(a),
the Assets do not include any rights or interests in any well that is not
specifically described on Exhibit B or in the production from any such well.

         3.      Effective Date.  The purchase and sale of the Assets shall be
effective, for all purposes, including allocation of revenue, expenses and
taxes, as of January 1, 1997 at 7:00 a.m. local time at the site of the Assets
(the "Effective Date").

         4.      Purchase Price.  The purchase price for the Assets shall be
$1,360,000  (the "Purchase Price").  Buyer shall pay the Purchase Price to
Seller in immediately available funds at the Closing.

         5.      Apportionment of Taxes and Production Revenues and Expenses.
Buyer shall be entitled to revenue from the sale of hydrocarbons produced from
the Assets on or after the Effective Date.  Buyer shall pay for costs and
expenses incurred with respect to the Assets on or after the Effective Date.
Seller shall be entitled to revenue from the sale of hydrocarbons produced from
the Assets before the Effective Date, and shall pay for costs and expenses
incurred with respect to the Assets prior to the Effective Date.  Taxes
relating to the Assets, including ad valorem, property, production, severance
and other taxes (other than income taxes) shall be allocated in the same manner
as other expenses, with taxes that are measured by or that relate to production
being treated as expenses in connection with such production regardless of the
period for which such taxes are assessed.





                                      -2-
<PAGE>   7
         6.      Buyer's Representations and Warranties.  Buyer makes the
following representations and warranties:

                 6.1      Existence.  Buyer is a limited liability company,
duly organized and validly existing under the laws of the State of Delaware,
and Buyer is duly qualified to carry on its business, and is duly qualified and
in good standing, in each of the states in which the nature of its business and
activities requires it to be so qualified.

                 6.2      Power and Authority.  Buyer has all requisite power
and authority to carry on its business as presently conducted, to enter into
this Agreement and each of the documents contemplated to be executed by Buyer
at Closing, and to perform its obligations under this Agreement and under such
documents.  The consummation of the transactions contemplated by this Agreement
and each of the documents contemplated to be executed by Buyer at Closing will
not violate, nor be in conflict with, (i) any provision of Buyer's
organizational or governing documents, (ii) any agreement or instrument to
which Buyer is a party or is bound, or (iii) any judgment, decree, order,
statute, rule or regulation applicable to Buyer.

                 6.3      Authorization.  The execution, delivery and
performance of this Agreement and each of the documents contemplated to be
executed by Buyer at Closing and the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite action on the
part of Buyer.

                 6.4      Execution and Delivery.  This Agreement has been duly
executed and delivered on behalf of Buyer, and at the Closing all documents and
instruments required hereunder to be executed and delivered by Buyer shall have
been duly executed and delivered.  This Agreement does, and such documents and
instruments shall, constitute legal, valid and binding obligations of Buyer
enforceable in accordance with their terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application with respect to creditors, (ii) general principles of
equity and (iii) the power of a court to deny enforcement of remedies generally
based upon public policy.

                 6.5      Securities Laws.  Buyer is purchasing the Assets for
Buyer's account, not for public distribution thereof, and Buyer shall not sell
or transfer all or any part of, or any interest in, the Assets in violation of
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or the securities laws of any state.

                 6.6      Brokers' Fees.  Buyer has incurred no liability,
contingent or otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Seller shall have any
responsibility whatsoever.

         7.      Seller's Representations and Warranties.  Seller makes the
following representations and warranties:

                 7.1      Existence.  Seller is a corporation duly organized
and validly existing under the laws of the State of Delaware, and Seller is
duly qualified to carry on its business, and is in good





                                      -3-
<PAGE>   8
standing, in the States of Texas, West Virginia and Oklahoma and is in good
standing in each jurisdiction in which the failure to qualify would have a
material adverse impact on the Assets or the transaction contemplated by this
Agreement.

                 7.2      Power and Authority.  Seller has all requisite
corporate power and authority to carry on its business as presently conducted,
to enter into this Agreement and each of the documents contemplated to be
executed by Seller at Closing, and to perform its obligations under this
Agreement and under such documents.  The consummation of the transactions
contemplated by this Agreement and each of the documents contemplated to be
executed by Seller at Closing will not violate, nor be in conflict with, (i)
any provision of Seller's certificate of incorporation, bylaws or governing
documents, (ii) any material agreement or instrument to which Seller is a party
or is bound, or (iii) any judgment, decree, order, statute, rule or regulation
applicable to Seller; provided that, Seller has or in good faith will use
reasonable efforts to secure (a) consents of or filings with the United States
Department of Interior or the applicable state agencies or authorities in
connection with the assignment of any federal or state leases or any interest
therein ("Governmental Consents"), (b) waivers of preferential rights to
purchase all or any portion of the Assets and consents to or notices of
assignment necessary to convey all or any portion of the Assets which are not
Governmental Consents, and (c) waivers of maintenance of uniform interest
provisions in applicable operating agreements; provided, however, Seller shall
not be required to commence or fund any litigation, or otherwise expend any
funds, to obtain any such third party consents.

                 7.3      Authorization.  The execution, delivery and
performance of this Agreement and each of the documents contemplated to be
executed by Seller at Closing and the transactions contemplated hereby and
thereby have been duly and validly authorized by all requisite corporate action
on the part of Seller.

                 7.4      Execution and Delivery.  This Agreement has been duly
executed and delivered on behalf of Seller, and all documents and instruments
required hereunder to be executed and delivered by Seller have been duly
executed and delivered.  This Agreement does, and such documents and
instruments shall, constitute legal, valid and binding obligations of Seller
enforceable in accordance with their terms, subject to (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application with respect to creditors, (ii) general principles of
equity and (iii) the power of a court to deny enforcement of remedies generally
based upon public policy.

                 7.5      Brokers' Fees.  Seller has incurred no liability,
contingent or otherwise, for brokers' or finders' fees relating to the
transactions contemplated by this Agreement for which Buyer shall have any
responsibility whatsoever.

                 7.6      Reserve Report.  The term "Reserve Report" shall mean
the reserve report prepared on behalf of Seller by Miller & Lenz, Ltd. and
based on reserves as of December 31, 1996, and attached hereto as Exhibit G.
To Seller's best knowledge, the average price for sales of hydrocarbons (based
on contract prices for existing effective contracts and estimates of spot
prices adjusted for transportation costs), historical costs of operations,
production volumes, payout data, pressure and test data, and other historical
information used in the preparation of the Reserve Report





                                      -4-
<PAGE>   9
were, on the dates so used, accurate in all material respects and Seller has no
reason to question the estimations set forth in the Reserve Report.  The
Reserve Report covers only the Wells.  The working interests ("WI") and net
revenue interest ("NRI") for each Well set forth on Exhibit B are the same as
the working interests and net revenue interests in such Wells used to prepare
the Reserve Report.  To Seller's best knowledge, since the reserve report was
prepared, there have been no material adverse changes affecting the Assets
other than (i) depletion through normal production within authorized allowables
in accordance with normal and expected production declines, (ii) depreciation
of equipment and other personal property through ordinary wear and tear, and
(iii) general industry-wide conditions, including without limitation, changes
in the prices of hydrocarbons.

                 7.7      Liens.  Except for the burdens and obligations
created by or arising under the Leases and except for Permitted Encumbrances,
the Assets are free and clear of all Encumbrances.  As used herein, the term
"Encumbrances" shall mean all royalties, overriding royalties, production
payments, debts, liens, mortgages, security interests, claims, obligations and
encumbrances.  Except to the extent that such "Permitted Encumbrances" reduce
Seller's interest in the production from the Wells to less than the NRI set
forth on Exhibit B, as used herein, the term "Permitted Encumbrances" shall
mean the following:

                 (i)      the burdens, encumbrances and obligations created by
         or arising under the Leases and all royalties, overriding royalties,
         net profits interests, carried interests, reversionary interests,
         back-in rights and other burdens to the extent that the foregoing do
         not increase the share of costs that Seller is obligated to pay to
         more than the WI, or reduce Seller's interest in production to less
         than the NRI set forth in Exhibit B for the Wells;

                 (ii)     all rights to consent by, required notices to, filing
         with, or other actions by governmental entities in connection with the
         sale or conveyance of the Assets if the same are customarily obtained
         subsequent to such sale or conveyance;

                 (iii)    rights of reassignment upon surrender of the Leases
         held by predecessors in interest to Seller;

                 (iv)     easements, rights-of-way, servitudes, permits,
         licenses, surface leases and other rights in respect of surface use to
         the extent these do not materially interfere with operations or
         production on or from the Assets;

                 (v)      rights and regulatory powers reserved to or vested in
         any municipality or governmental, statutory or public authority;

                 (vi)     all Agreements as defined in Section 2.2(c) to the
         extent such Agreements are ordinary and customary in the oil and gas
         exploration, developing,  processing and extraction business and do
         not increase the share of costs which Seller is obligated to pay to
         more than the WI, or reduce Seller's interest in production from the
         Wells to less than the NRI, set forth on Exhibit B for the Wells (the
         "Material Agreements");





                                      -5-
<PAGE>   10
                 (vii)    any (x) undetermined or inchoate liens or charges
         constituting or securing the payment of expenses which were incurred
         incidental to maintenance, development, production or operation of the
         Assets or for the purpose of developing, producing or processing oil,
         gas or other hydrocarbons therefrom or therein and (y) materialman's,
         mechanics', repairman's, employees', contractors', operators' or other
         similar liens, security interests or charges for liquidated amounts
         arising in the ordinary course of business incidental to construction,
         maintenance, development, production or operation of the Assets or the
         production or processing of oil, gas or other hydrocarbons therefrom,
         that are not delinquent and that will be paid in the ordinary course
         of business or, if delinquent, that are being contested in good faith;

                 (viii)   any liens for taxes not yet delinquent or, if
         delinquent, that are being contested in good faith in the ordinary
         course of business;

                 (ix)     all liens, charges, encumbrances, contracts,
         agreements, instruments, obligations, defects, irregularities and
         other matters affecting any Asset which individually or in the
         aggregate are not such as to interfere materially with the operation,
         value or use of such Asset.

                 7.8      Title.  Seller has Defensible Title to the Assets.
The term "Defensible Title" to the Assets means such record and beneficial
title of Seller that (i) entitles Seller to receive an interest in production
from the Wells not less than the NRI in the Wells as set forth on Exhibit B
throughout the productive life of each Well, (ii) obligates Seller to pay a
share of the costs of developing and operating the Wells not greater than the
WI as set forth on Exhibit B, (iii) entitles Seller to own such interest in the
Wells under applicable state law and for federal income tax purposes, and (iv)
is free and clear of any Encumbrances, except for the Permitted Encumbrances.
Any Asset for which Seller has less than Defensible Title shall be called a
"Defective Interest."  Any title defect or other deficiency which causes Seller
not to have Defensible Title to an Asset is called a "Title Defect".  Buyer's
exclusive remedy for Seller's breach of this representation and warranty is set
forth in Section 12.3 of this Agreement and Section 4.8 of the Assignment.

                 7.9      Preferential Purchase Rights and Consents.  To
Seller's best knowledge, except as set forth in Part 1 of Exhibit G, there do
not exist any preferential rights to purchase all or any portion of the Assets.
To Seller's best knowledge, except for Governmental Consents and as set forth
in Part II of Exhibit G, there are no consents or waivers necessary to convey
any material portion of the Assets pursuant to this Agreement.  Buyer's
exclusive remedy for Seller's breach of this representation and warranty is set
forth in Section 12.4.

                 7.10     No Prepayments.  To Seller's best knowledge, Seller
is not obligated, by virtue of a prepayment arrangement, a "take or pay"
arrangement, a production payment, hedging or any other arrangement, to deliver
any material portion of hydrocarbons produced from the Assets at some future
time without then or thereafter receiving full payment therefor.





                                      -6-
<PAGE>   11
                 7.11     Gas Balancing.  To Seller's best knowledge, no
material portion of hydrocarbons produced from the Assets are subject to a gas
imbalance or other arrangement requiring delivery of hydrocarbons without
receiving full payment therefor.

                 7.12     Leases.  To Seller's best knowledge, all royalties,
rentals and other payments due by Seller under the Leases have been properly
and timely paid except where the failure to pay same will not have a material
adverse effect on the value of the particular Asset.  To Seller's best
knowledge, all Leases are presently in full force and effect.  To Seller's best
knowledge, Seller has not received a written notice of material default under
any Lease that could result in cancellation of the Lease.

                 7.13     Operations in Progress.  To Seller's best knowledge,
as of the date of this Agreement, there are no operations in progress with
respect to the Assets which are reasonably expected to exceed [$35,000] per
project in cost net to Seller's interest and which shall be payable in whole or
in part on or after the Effective Date.

                 7.14     Hydrocarbon Sales Contracts.  To Seller's best
knowledge, no material portion of the hydrocarbons produced from the Assets are
subject to a sales contract or other agreement relating to the production,
gathering, transporting, processing, treating or marketing of hydrocarbons
except those which can be terminated by Seller upon not more than three months
notice, and no person has any call upon, option to purchase or similar rights
with respect to any material portion of the Assets or to the production
therefrom.

                 7.15     Proceeds of Production.  To Seller's best knowledge,
Seller is currently receiving from all purchasers of production from the Assets
at least the NRI set forth in Exhibit B without suspense or any indemnity other
than the normal division order warranty of title, the nonreceipt of which would
have a material adverse effect on the value of the Assets.

                 7.16     Material Contracts.  To Seller's best knowledge, the
Material Agreements are in full force and effect.   Seller has not received
written notices of material default under the Material Agreement that remains
uncured, and no material default exists in the performance by any party of its
obligations under any Material Agreement.

                 7.17     Bills in the Ordinary Course.  In the ordinary course
of business and to Seller's best knowledge, Seller is current on its payments
for all costs and expenses pertaining to the Assets, except where such payments
are being contested with good faith or except where the failure to make such
payments would not have a material adverse effect on the Assets.

                 7.18     Legal Proceedings. No suit, action or other
proceeding is pending against Seller or, to Seller's best knowledge, threatened
in writing against Seller before any court, governmental agency, arbitrator or
other panel that relates to the Assets or the transaction contemplated by this
Agreement that might (i) impair Seller's ability to consummate the transaction
contemplated by this Agreement or (ii) cause the impairment or loss of Seller's
title to any material portion of the Assets or the value thereof or (iii)
hinder or impede the operation or enjoyment of the Leases in any material
respect insofar as they relate to the Assets.





                                      -7-
<PAGE>   12
                 7.19     Compliance with Laws.  To Seller's best knowledge,
all laws, rules, regulations, ordinances and orders (of all governmental and
regulatory bodies having authority over the Assets) material to the operation
of the Assets have been complied with in all material respects.

                 7.20     Environmental Matters.  To Seller's best knowledge,
no conditions exist on or in connection with the Assets that would subject
Seller or Buyer to any damages, remedial action, injunctive relief or other
liability under any Environmental Laws, including without limitation, all costs
associated directly or indirectly with cleanup, removal, closure or other
response actions.  Seller and its predecessors have obtained and are in
material compliance with all Environmental Laws and all material permits,
licenses and approvals required under Environmental Laws.

                 As used herein, the term "Environmental Laws" shall mean any
and all existing laws (common or statutory), rules, regulations, codes, or
ordinances issued or promulgated by any federal, state or local governmental
entity relating to the management and disposal of waste materials, the
protection of public or employee health and safety, the cleanup, remediation or
prevention of pollution, or the protection of the environment.

                 7.21     Payment of Taxes.  To Seller's best knowledge, all ad
valorem, property, production, severance, excise and similar taxes and
assessments based on or measured by the ownership of property or the production
of hydrocarbons or the receipt of proceeds therefrom on the Assets which are
currently due and payable have been properly and timely paid, except to the
extent such taxes are being contested in good faith in the ordinary course of
business.

                 7.22     Tax Partnerships.  No portion of the Assets (i) has
been contributed to and is currently owned by a tax partnership; (ii) is
subject to any form of agreement (whether formal or informal, written or oral)
which has been determined by any state or federal tax statute, rule or
regulation to be or to have created a tax partnership; or (iii) otherwise
constitutes "partnership property" (as that term is used throughout Subchapter
K of Chapter 1 of Subtitle A of the Code) of a tax partnership.  For purposes
of this Section 7.22, a "tax partnership" is any entity, organization or group
deemed to be a partnership within the meaning of Section 761 of the Code or any
similar state or federal statute, rule or regulation, and that is not excluded
from the application of the partnership provisions of Subchapter K of Chapter 1
of Subtitle A of the Code and of all similar provisions of state tax statutes
or regulations by reason of elections made, pursuant to Section 761(a) of the
Code and all such similar state or federal statutes, rules and regulations, to
be excluded from the application of all such partnership provisions.

                 7.23     Other Tax Matters.

                          (a)     NGPA Determination.  Seller or its
predecessor in interest has filed or caused to be filed with the applicable
state and/or federal agencies "Applications" for well determination for each
Well under the Natural Gas Policy Act of 1978, as amended (the "NGPA") and the
rules and regulations of the Federal Energy Regulatory Commission (the "FERC")
under such act (the "NGPA Regulations") requesting a determination that all or
a quantifiable portion of the gas produced from a particular Well is "natural
gas produced from designated tight formations" or natural gas produced from
Devonian Shale as defined in 18 C.F.R.  274.205(e).  Each such





                                      -8-
<PAGE>   13
application has been approved by the indicated state and/or federal agency and
by the FERC and has been finally approved under and in accordance with Section
503 of the NGPA.  Such applications comply with the requirements of the NGPA
and the NGPA Regulations and do not (1) contain any untrue statement of
material fact or (2) omit any statement of material fact necessary to make the
statements therein not misleading.  No further applications are required under
the NGPA and the NGPA Regulations to allow the legal sale of all gas produced
from the Assets at a price equal to the price for such gas currently being
received.  Production from qualifying formations which is commingled with
production from non-qualifying formations has been allocated on a reasonable
basis.

                          (b)     Wells.  Each Well producing from a tight sand
formation was spud and continuously drilled into the qualifying tight sand
formation after November 5, 1990 and prior to January 1, 1993.  In certain
instances, the Wells may penetrate unexploited tight sand formations uphole of
current producing zones which should qualify as tight sand formations in
accordance with Situation 1 of Revenue Ruling 93-54. Each well producing gas
from Devonian shale was drilled after December 31, 1979 and before January 1,
1993.  The hydrocarbons produced from each Well are "qualifying fuels" within
the meaning of Code Section  29(c).

                          (c)     No Qualified Production prior to January 1,
1980.  Prior to January 1, 1980, there was no production of oil or gas from,
nor were any wells drilled or completed on, the "property" (within the meaning
of Section 29 of the Code) on which any Well is located nor was any portion of
any such "property" included within a unit from which oil or gas was produced
or in which any wells were drilled or completed prior to such date.

                          (d)     No Enhanced Oil Recovery Credit.  No oil or
gas produced from the Wells qualifies or has qualified for (i) the enhanced oil
recovery credit or any other credit under Section 43 of the Code and none has
been claimed or taken on such oil or gas or (ii) the credit allowed under
Section 38 of the Code by reason of the energy percentage with respect to
property used in the project.

                          (e)     No Government Financing.  No portion of any
drilling, equipping, seismic or other development costs of the Assets paid by
Seller were financed by any state, local or federal agency, directly or
indirectly, including by way of grant, loan, expenditure or loan guaranty.

                          (f)     Production Payment.  The Production Payment
to be retained by Seller is expected to expire, when 73.7% of the original
estimated recoverable reserves in place on the Effective Date attributable to
the Leases have been produced.

                          (g)     Seller Status.  Seller is not a nonresident
alien, foreign corporation, foreign partnership, foreign trust or foreign
estate (as those terms are defined in the Code and the rules and regulations
promulgated thereunder), and Seller shall deliver to Buyer a certificate of
non-foreign ownership in the form of Exhibit F.

                          (h)     Tax Ownership.  Buyer will be treated as the
owner of the Assets for federal income tax purposes.





                                      -9-
<PAGE>   14
Buyer's sole and exclusive remedy for breach of any of the representations and
warranties in this Section 7.23 is set forth in Section 4.8 of the Assignment.

                 7.24.    Condition.  To the best of Seller's knowledge, each
Well has been drilled, completed, equipped and maintained in all material
respects in a good and workmanlike manner in accordance with good oilfield
practices, and to Seller's knowledge there is no material hazardous or
dangerous condition existing with respect to any Well, equipment or facilities
which are part of the Assets.

         8.      Tax Status.  Seller and Buyer intend that the Production
Payment shall constitute debt for federal income tax purposes.

         9.      Covenants.

                 9.1      Cooperation and Access.  Following execution of this
Agreement, Seller shall cooperate fully with Buyer's post-signing due diligence
efforts, both at Seller's offices and at the sites of the Assets.

                 9.2      Insurance.  At or prior to Closing, Seller shall
cause Buyer to be named as an additional insured on all insurance policies
Seller has that pertain in any way to the ownership and operation of the
Assets.  Upon request, Seller will provide Buyer Certificates of Insurance
naming Buyer as an additional insured, or other evidence, satisfactory to
Buyer, of compliance with this section.

                 9.3      Subsequent Consents.  Notwithstanding the further
assurances provisions of Section 15.1, following execution of this Agreement,
Seller shall use reasonable efforts to obtain such subsequent consents as may
be required from third -parties with whom Seller has contractual privity to
allow the parties hereto to experience the benefits of the transactions
contemplated hereunder; provided, however, Seller shall not be required to
commence or fund any litigation, or otherwise expend any funds, to obtain any
such third party consents.

         10.     No Conditions to Closing.  Other than securing the execution
and delivery of the documents which are contemplated to be executed and
delivered by it pursuant to Section 11, there are no conditions to Closing.

         11.     Closing.  The consummation of the transactions contemplated
hereby (the "Closing") shall occur, either in person or by facsimile, at the
offices of Seller in Houston, Texas on or before March 31, 1997 (the "Closing
Date") beginning at 11:00 a.m. or at such other time and place as the parties
may agree to in writing.  At Closing, the following events shall occur, each
being a condition precedent to the others and each being deemed to have
occurred simultaneously with the others (except where the documents involved
indicate otherwise):

                 11.1     Assignment and Option.  Seller and Buyer shall
execute and deliver the Assignment and the Option.  In addition, Seller shall
prepare within a reasonable period of time and Seller and Buyer shall execute
such other conveyances on official forms and related documentation





                                      -10-
<PAGE>   15
necessary to transfer the Assets to Buyer in accordance with requirements of
governmental regulations; provided, however, that any such separate or
additional conveyances required pursuant to this Section 11.1 or pursuant to
Section 15.1 (i) shall evidence the conveyance and assignment of the Assets
made or intended to be made in the Assignment, (ii) shall not modify or be
deemed to modify any of the terms, reservations, covenants and conditions set
forth in the Assignment, and (iii) shall be deemed to contain all of the terms,
reservations and provisions of the Assignment, as though the same were set
forth at length in such separate or additional conveyance.

                 11.2     Payment of Purchase Price.  Buyer shall deliver the
Purchase Price by wire transfer to Seller's account in accordance with written
instructions supplied by Seller.

                 11.3     Management Agreement.  Seller and Buyer shall execute
and deliver the Management Agreement and Memorandum of Management Agreement
(collectively, the "Management Agreement") substantially in the form attached
hereto as Exhibit E.

                 11.4     Non-Foreign Ownership Certificate.  Seller shall
deliver to Buyer a certificate of non-foreign ownership substantially in the
form of Exhibit F.

                 11.5     Additional Instruments.  Seller and Buyer shall
execute, acknowledge and deliver to each other such additional instruments as
are reasonable and customary to accomplish the purposes of this Agreement.

         12.     Post-Closing Matters.

                 12.1     Files and Records.  Following Closing, Seller shall
retain physical possession of all lease files, land files, division order
files, production marketing files and production records in Seller's possession
relating to the Assets (the "Records").  However, except to the extent that
Buyer's inspection thereof would violate legal constraints or legal
obligations, Buyer shall have the right to inspect the Records in Seller's
offices at any reasonable time.  At Buyer's request in writing (which written
request may be delivered by fax), to the extent that Seller's delivery thereof
would not violate legal constraints or legal obligations, Seller shall make
copies of the Records or materials in the Records at Seller's expense and shall
deliver said copies to Buyer at Seller's expense, provided that Seller may
charge Buyer the actual costs for such copies and delivery if such costs exceed
$250 per request.  If Buyer requires copies of the Records for its own account,
Seller will permit Buyer, at Buyer's own expense, to make copies of pertinent
material contained in the Records to the extent such action would not violate
legal constraints or legal obligations.

                 12.2     Sales Taxes and Recording Fees.  Seller shall pay all
taxes and fees occasioned by the sale of the Assets, including without
limitation, any transfer fees and sales taxes, and any documentary, filing and
recording fees required in connection with the filing and recording of any
assignments delivered hereunder.

                 12.3     Purchase Price Adjustments for Defective Interests.
In addition to the remedy provisions of Section 4.8 of the Assignment, Buyer
shall be entitled to the following rebate if Seller does not have Defensible
Title to any Assets and Seller has not cured the Title Defect causing such





                                      -11-
<PAGE>   16
Asset to be a Defective Interest within 30 days after notice from Buyer.  At
any time and from time to time, if Buyer discovers that Seller has breached the
representations and warranties in Section 7.8 or 7.12, Buyer may give Seller a
Notice of Defective Interests, which notice shall describe the Defective
Interest, the Title Defect, and the value of the Title Defect.  Buyer shall be
entitled to a rebate in the Purchase Price for a Title Defect which shall be
equal to the product obtained by multiplying the Purchase Price by a fraction,
the numerator of which is the volume of reserves allocated to the Title Defect
(which shall be determined in the manner described below) and the denominator
of which is the total volume of reserves allocated to all of the Assets in the
Reserve Report.  The volume of reserves allocated to the Title Defect shall be
determined by multiplying the volume of reserves allocated to the affected Well
in the Reserve Report by a fraction, the numerator of which is the reduction in
the NRI in such Well resulting from the Title Defect and the denominator of
which is the NRI specified for such Well in Exhibit B; provided, however, that
if the Title Defect does not remain in effect during the entire productive life
of the subject Well, such fact shall be taken into account in determining the
value of the Title Defect.  In addition to the payments and adjustments
pursuant to the foregoing provisions of this Section 12.3 and Section 4.8 of
the Assignment, Seller shall also protect, defend, indemnify and hold Buyer,
its employees, representatives, agents, successors and assigns harmless from
and against any and all claims, demands and causes of action asserted by any
third party relating to the Defective Interests.  THIS INDEMNITY SHALL INCLUDE
ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE
(BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED
BY ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY
OF STRICT LIABILITY.

                 12.4     Purchase Price Adjustment for Exercised Preferential
Purchase Rights and Failure to Obtain Consents. If the representation and
warranty in Section 7.9 is breached and such breach is not cured by Seller
within 30 days after notice in writing from Seller, then in addition to the
remedy provisions of Section 4.8 of the Assignment, , a portion of the Purchase
Price shall be rebated for the value of such affected Asset and such affected
Asset shall be excluded from the Assets conveyed to Buyer pursuant to the terms
hereof (collectively the "Excluded Assets").  The amount of the rebate in the
Purchase Price for an Excluded Asset shall be determined in accordance with the
provisions of Section 12.3.  In addition to the payments and adjustments
pursuant to the foregoing provisions of this Section 12.4 and Section 4.8 of
the Assignment, Sellers shall also protect, defend, indemnify and hold Buyer,
its agents, employees, representatives, successors and assigns harmless from
and against any and all claims, demands, and causes of action asserted by any
third party relating to the Excluded Assets.  THIS INDEMNITY SHALL INCLUDE ANY
LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE (BUT
NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED BY
ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY OF
STRICT LIABILITY, EXCLUDING, HOWEVER, ANY SUCH LOSSES RESULTING SOLELY FROM (i)
THE PHYSICAL PRESENCE ON THE ASSETS OF ANY (y) ANY EMPLOYEE OF BUYER, OR (z)
ANY PERSON ACTING AT THE EXPRESS DIRECTION OF BUYER, OR ANY EMPLOYEE, AGENT OR
REPRESENTATIVE OF BUYER (OTHER THAN MANAGER, ANY OPERATOR SUPERVISED BY MANAGER
OR ANY AGENT, CONTRACTOR, SUBCONTRACTOR, VENDOR OR SUPPLIER OF MANAGER OR





                                      -12-
<PAGE>   17
OF ANY OPERATOR SUPERVISED BY MANAGER), OR (ii) THE NEGLIGENCE OF BUYER
OCCURRING AFTER THE TERMINATION OF THE MANAGEMENT AGREEMENT.

                 12.5     Allocation of Seller's Interest in Production.  If
Seller has interests in the lands covered by the Leases that are not part of
the Assets ("Seller's Interests"), and such Seller's Interests are actually
producing hydrocarbons into a Well and such hydrocarbons are commingled with
the hydrocarbons produced from the Assets, Seller shall use reasonable efforts
to ensure that hydrocarbons attributable to Seller's Interests and to the
Assets are allocated in a reasonable and prudent manner.

         13.     Apportionment of Liabilities and Obligations.

                 13.1     Buyer.  Upon Closing, subject to Seller's
indemnification obligation set forth in Section 14.2 and the terms of the
Management Agreement, Buyer shall assume and pay for all costs, expenses,
liabilities and obligations accruing or relating to the owning, operating or
maintaining of the Assets or the producing, transporting and marketing of
hydrocarbons from the Assets, relating to periods on and after the Effective
Date, including without limitation, all obligations arising under the Permitted
Encumbrances (collectively, the "Post-Effective Date Liabilities"); provided,
however, that Buyer shall not assume any obligations and shall have no
liability (contingent or otherwise) whatsoever with respect to the defective
portion of any Defective Interests or any Excluded Assets.

                 13.2     Seller.  Upon Closing, Seller shall retain, assume
and pay for all costs, expenses, liabilities and obligations accruing or
relating to the owning, operating or maintaining of the Assets or the
producing, transporting and marketing of hydrocarbons from the Assets, relating
to periods before the Effective Date, including without limitation,
environmental obligations and liabilities arising out of any event, condition
or matter occurring or in existence on or prior to the Closing Date involving
Environmental Matters, the obligation to plug and abandon wells, off site
liabilities associated with the Assets, and all obligations arising under
agreements covering or relating to the Assets (collectively, the "Pre-Effective
Date Liabilities").  For purposes of this Agreement, "Environmental Matter"
shall mean any event, condition or matter relating to Environmental Laws or the
release of materials into the environment or protection of the environment or
health.

         14.     Indemnification.  For the purposes of this Agreement, "Losses"
shall mean any actual loss, cost and expense (including reasonable fees and
expenses of attorneys, technical experts and expert witnesses), liability, and
damage (including those arising out of demands, suits, sanctions of every kind
and character); provided, however, that in no event shall "Losses" be deemed to
include consequential damages involving lost profits or loss of tax credits..

                 14.1     Buyer's Indemnification of Seller.  Subject to the
terms of and the indemnification obligations contained in Section 14.2 and the
terms of the Management Agreement, Buyer shall indemnify and hold harmless
Seller, its officers, directors, shareholders, employees, representatives,
agents, successors and assigns, forever, from and against all Losses and
interest





                                      -13-
<PAGE>   18
thereon which arise from or in connection with (i) the Post-Effective Date
Liabilities, and (ii) the Buyer's breach by Buyer of any of its
representations, warranties or covenants in this Agreement.

                 14.2     Seller's Indemnification of Buyer.  Seller shall
indemnify and hold harmless Buyer, its officers, directors, members, employees,
representatives, agents, successors and assigns, forever, from and against all
Losses and interest thereon which arise from or in connection with (i) the
Pre-Effective Date Liabilities, (ii) breach by Seller of any of its
representations, warranties or covenants in this Agreement regardless of
Seller's knowledge if such representations and warranties are knowledge
qualified, and (iii) any event, condition or matter, including Environmental
Matters, occurring or in existence on or prior to the Closing Date in
connection with the ownership or operation of the Assets.  THIS INDEMNITY SHALL
INCLUDE ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE
NEGLIGENCE (BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY
LOSSES INCURRED BY ANY INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE,
REGULATION OR THEORY OF STRICT LIABILITY.  NOTWITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED IN THIS SECTION 14.2, THIS SECTION 14.2 SHALL NOT APPLY TO
BREACH OF ANY REPRESENTATION OR WARRANTY FOR WHICH AN EXCLUSIVE REMEDY IS
EXPRESSLY SET FORTH IN SECTION 12.3 OR 12.4 OF THIS AGREEMENT OR SECTION 4.8 OF
THE ASSIGNMENT.

                 14.3     Third Party Claims.  If a claim by a third party is
made against Seller or Buyer (an "Indemnified Party"), and if such party
intends to seek indemnity with respect thereto under this Section 14, such
Indemnified Party shall promptly notify Buyer or Seller, as the case may be
(the "Indemnitor"), of such claims.  The Indemnitor shall have 30 days after
receipt of such notice to undertake, conduct and control, through counsel of
its own choosing and at its own expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with it in connection therewith; provided
that the Indemnitor shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by such Indemnified Party,
however, the fees and expenses of such counsel shall be borne by such
Indemnified Party.  So long as the Indemnitor, at Indemnitor's cost and
expense, (1) has undertaken the defense of, and assumed full responsibility for
all Losses with respect to, such claim, and (2) is reasonably contesting such
claim in good faith, by appropriate proceedings, the Indemnified Party shall
not pay or settle any such claim.  Notwithstanding compliance by the Indemnitor
with the preceding sentence, the Indemnified Party shall have the right to pay
or settle any such claim, provided that in such event it shall waive any right
to indemnity therefor by the Indemnitor for such claim.  If, within thirty (30)
days after the receipt of the Indemnified Party's notice of a claim of
indemnity hereunder, the Indemnitor does not notify the Indemnified Party that
it elects, at Indemnitor's cost and expense, to undertake the defense thereof
and assume full responsibility for all Losses with respect thereto, or gives
such notice and thereafter fails to contest such claim in good faith, the
Indemnified Party shall have the right to contest, settle or compromise the
claim but shall not thereby waive any right to indemnity therefor pursuant to
this Agreement.





                                      -14-
<PAGE>   19
         15.     Miscellaneous.

                 15.1     Further Assurances.  After Closing, Seller and Buyer
shall execute, acknowledge and deliver or cause to be executed, acknowledged
and delivered such instruments and take such other action as may be reasonably
necessary or advisable to carry out the purposes and intents of this Agreement
and any document, certificate or other instrument delivered pursuant hereto.

                 15.2     Expenses.  Each party shall bear and be liable for
its own direct and indirect expenses incurred in connection with the
negotiation and preparation of this Agreement and the consummation and
performance of the transactions contemplated by this Agreement.  Without
limitation, such expenses shall include the fees and expenses of all attorneys,
accountants, financial advisers and other professionals incurred in connection
herewith.

                 15.3     Notices.  All notices under this Agreement shall be
in writing and addressed as set forth below.  Any communication or delivery
hereunder shall be deemed to have been duly made and the receiving party
charged with notice (i) if personally delivered or telecopied, when received,
(ii) if mailed, three business days after mailing, certified mail, return
receipt requested, or (iii) if sent by overnight courier, one day after
sending.  All notices shall be addressed as follows:
        
                 If to Seller:    The Houston Exploration Company
                                  1331 Lamar, Suite 1065         
                                  Houston, Texas 77010        
                                  Attn:  Thomas W. Powers     
                                  Telephone:  (713) 652-2847  
                                  Fax:  (713) 652-4017        
                                                       



                 If to Buyer:     KeySpan Natural Fuel, LLC
                                  One Metrotech Center
                                  Brooklyn, New York 11201
                                  Attention:  Zain Mirza
                                  Telephone:  (718) 403-2260
                                  Fax:  (718) 858-6431

                 Any party may, by written notice so delivered to the other
party, change the address or individual to which delivery shall thereafter be
made.

                 15.4     Survival.  The representations, warranties,
covenants, agreements and indemnities included or provided in this Agreement
shall survive Closing.

                 15.5     Confidentiality.  Buyer and Seller shall keep this
Agreement confidential except to the extent each may be required to disclose
the contents hereof by recording the Assignment, Option and Memorandum of
Management Agreement in the real property records in





                                      -15-
<PAGE>   20
the counties in which the Assets are located or filing the official forms of
conveyance covering the Assets with appropriate governmental authorities, or to
the extent required in the operation of the Assets or pursuant to the
Management Agreement, by law, regulation or order, or in the ordinary course of
business whenever required or appropriate in the judgment of either party.

                 15.6     Assignment.  Neither party may assign its rights or
delegate its duties or obligations under the terms of this Agreement without
the prior written consent of the other party which consent shall not be
unreasonably withheld.  Notwithstanding the foregoing, Buyer may assign its
rights or delegate its duties or obligations to any of its Affiliates (as
defined in the Assignment) without the consent of Seller.

                 15.7     Binding Effect.  This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their successors and,
subject to Section 15.7, their assigns.

                 15.8     Complete Agreement.  When executed by the authorized
representative of Seller and Buyer, this Agreement, the Exhibits hereto and the
documents to be delivered pursuant hereto shall constitute the complete
agreement between the parties.  This Agreement may be amended only by a writing
signed by both parties.

                 15.9     Knowledge.  As used in this Agreement, the term
"knowledge" shall mean the actual knowledge of any fact, circumstance or
condition by the officers or employees at a manager or higher level of the
party involved as such knowledge has been obtained in the performance of their
duties in the ordinary course of business after making reasonable and
appropriate inquiries.

                 15.10    Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK EXCEPT TO
THE EXTENT THE LAWS OF ANY OTHER STATE ARE MANDATORILY APPLICABLE.

                 15.11    Counterparts.  This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other party.





                                      -16-
<PAGE>   21
         EXECUTED as of the date first above mentioned.

                                 BUYER:                                   
                                                                          
                                 KEYSPAN NATURAL FUEL, LLC                
                                                                          
                                 By:  /s/ ZAIN MIRZA
                                    -------------------------------------  
                                          Zain Mirza                      
                                          Chief Financial Officer         
                                                                          
                                                                          
                                 SELLER:                                  
                                                                          
                                 THE HOUSTON EXPLORATION COMPANY, INC.    
                                                                          
                                 By:  /s/ THOMAS W. POWERS
                                    -------------------------------------  
                                          Thomas W. Powers                
                                          Senior Vice President           





                                      -17-
<PAGE>   22
                                   EXHIBIT A
                                       TO
                          PURCHASE AND SALE AGREEMENT


                                     LEASES

Part 1:  Oklahoma

The following oil and gas leases covering lands in Latimer and Le Flore
Counties, Oklahoma.



[EXHIBIT A, PART 1 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
OKLAHOMA LEASES]





<PAGE>   23
                                   EXHIBIT A
                                       TO
                          PURCHASE AND SALE AGREEMENT


                                     LEASES



Part 2:  Texas

The following oil and gas leases covering lands in Gregg and Panola Counties,
Texas:



[EXHIBIT A, PART 2 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
TEXAS LEASES]





<PAGE>   24
                                   EXHIBIT A
                                       TO
                          PURCHASE AND SALE AGREEMENT


                                     LEASES



Part 3:  West Virginia

The following oil and gas leases covering lands in Barbour, Doddridge,
Harrison, Lewis and Randolph Counties, West Virginia:




[EXHIBIT A, PART 3 HAS BEEN OMITTED AS IT CONTAINS A LEGAL DESCRIPTION OF ALL
WEST VIRGINA LEASES]





<PAGE>   25
                                   EXHIBIT B
                                       TO
                          PURCHASE AND SALE AGREEMENT


                                   WELL LIST




[EXHIBIT B HAS BEEN OMITTED AS IT CONTAINS A LISTING OF ALL WELLS PURCHASED AND
SOLD]





<PAGE>   26
                                   EXHIBIT C


                        ASSIGNMENT OF OIL AND GAS LEASES
                     WITH RESERVATION OF PRODUCTION PAYMENT


         THIS ASSIGNMENT ("Assignment") is made effective as of January 1, 1997
(the "Effective Date") by and between The Houston Exploration Company, Inc., a
Delaware corporation, whose address is 1331 Lamar, Suite 1065, Houston, Texas
77010 (herein called "Grantor"), and  KeySpan Natural Fuel, LLC, a Delaware
limited liability company, whose address is One Metrotech Center, Brooklyn, New
York 11201 (herein called "Grantee").

                                   ARTICLE 1

                       CERTAIN DEFINITIONS AND REFERENCES

         1.1     Certain Defined Terms.  When used in this Assignment, the
following terms shall have the respective meanings assigned to them in this
Section 1.1 or in the sections and subsections referred to below:

                 "Affiliate" shall mean (a) any person directly or indirectly
         owning, controlling or holding with power to vote 50% or more of the
         outstanding voting securities of Grantee, (b) any person 50% or more
         of whose outstanding voting securities are directly or indirectly
         owned, controlled or held with power to vote by Grantee, (c) any
         person directly or indirectly controlling, controlled by or under
         common control with Grantee, and (d) any officer, director or partner
         or member of Grantee or any person described in clause (c) of this
         definition.

                 "Assignment" is defined in the first paragraph.

                 "BTU" means British Thermal Unit.

                 "Business Day" shall mean a day on which commercial banks are
         open for business in the state of Texas.

                 "Credit Payment Amount" shall mean, for any Payment Period, an
         amount equal to $0.75 of each dollar of tax credits (the "Tax
         Credits") available to Grantee under  Section 29 of the IRC, as a
         result of the sale of Subject Hydrocarbons by or on behalf of Grantee,
         to the extent that (a) such Subject Hydrocarbons (i) constitute
         "qualified fuels" within the meaning of IRC Section 29(c), (ii) meet
         the requirements of IRC Sections 29(d)(1), 29(d)(4) and 29(f), during
         (A) such Payment Period and (B) any earlier Payment Period to the
         extent the dollar amount of Tax Credits attributable thereto was not
         taken into account in a Credit Payment Amount for a previous Payment
         Period, and (iii) are produced from the Wells, and (b) Grantee is
         treated as the owner of the Subject Interests for federal income tax
         purposes.  For purposes of the preceding sentence, Tax Credits
         available to Grantee under IRC Section 29 shall be determined





                                      C-1
<PAGE>   27
         after taking into account any phase-out of Tax Credits under IRC
         Section 29(b)(1) and any applicable inflation adjustment under IRC
         Section 29(b)(2), but shall be determined without regard to
         limitations on Grantee's use of Tax Credits imposed by IRC Section
         29(b)(6) and without regard to whether Grantee actually utilizes such
         Tax Credits.  The Credit Payment Amount for any given Payment Period
         shall initially be based on (1) estimated Subject Hydrocarbon
         production and sales data available at the time of the calculation of
         such amount and (2) an estimated inflation adjustment (as provided
         under IRC Section 29(b)(2) based on the prior year's inflation factor;
         provided that such estimated figures shall be later corrected when
         actual data is available.  Credit Payment Amounts shall be calculated
         and, unless otherwise provided, will be credited to the Net Profits
         Account, with respect to gas produced and sold from January 1, 1997
         until the earlier of (x) December 31, 2002, or (y) the first day on
         which Tax Credits are no longer permitted for gas attributable to the
         Subject Hydrocarbons and produced and sold from the Wells.  The Credit
         Payment Amount shall not include payments for Tax Credits attributable
         to natural gas liquids, unless Tax Credits are available with respect
         to such liquids under applicable law.  If for any reason the Tax
         Credits are repealed by Congressional statute or resulting regulation,
         no Credit Payment Amount shall be credited with respect to Subject
         Hydrocarbons subject to such repeal.  If for any reason the amount of
         Tax Credits contemplated under this Agreement are reduced by
         Congressional statute or resulting regulation, the Credit Payment
         Amounts credited under this Agreement shall be reduced commensurate
         with such reduction in Tax Credits.

                 "Effective Date" is defined in the first paragraph.

                 "Full Production Date" shall mean the date on which the total
         volume of the Subject Hydrocarbons produced, saved and sold from and
         after the Effective Date equals a volume equivalent to 21,866 MMCF of
         gas (net to Grantee, using a conversion of 6 MCF/Barrel of liquid
         production); provided that such volume shall be decreased by an
         amount, if any, equal to the aggregate volume of reserves which are
         attributable to any Excluded Asset or any Title Defect (as such terms
         are defined in the Purchase Agreement).

                 "Grantee" shall mean Grantee as defined in the first paragraph
         of this Assignment, and its successors and assigns; and, unless the
         context in which used shall otherwise require, such term shall mean
         any successor-owner at the time in question of any or all of the
         Subject Interests.

                 "Grantor" shall mean Grantor as defined in the first paragraph
         and its successors and assigns; and, unless the context in which used
         shall otherwise require, such term shall mean any successor-owner at
         the time in question of any or all of the Production Payment.

                 "Gross Proceeds" shall have the meaning assigned to it in 
         Section 4.2(a).

                 "IRC" shall mean the Internal Revenue Code of 1986, as amended.

                 "Leases" is defined in Section 2.1(a).





                                      C-2
<PAGE>   28
                 "Management Agreement" means the Management Agreement between
         Grantor and Grantee dated as of January 1, 1997.

                 "Measurement Amount" is defined in Section 4.5.

                 "Net Profits" for any Payment Period shall mean the net
         balance, positive or negative, resulting after application of the
         credits and debits as provided in Sections 4.2 and 4.3 for such
         period.

                 "Net Profits Account" shall have the meaning assigned to it in
         Section 4.1.

                 "Non-Affiliate" shall mean any Person who is not an Affiliate.

                 "Option" shall mean that Option to Purchase Oil and Gas
         Interests between Grantor and Grantee dated as of January 1, 1997.

                 "Other Income" is defined in Section 4.2(b).

                 "Payment Period" shall mean a calendar quarter, provided that
         the first Payment Period shall mean the period from the Effective Date
         until the end of the calendar quarter during which the Effective Date
         occurs, and the last Payment Period shall mean the portion of the
         calendar quarter during which the Termination Date occurs from the
         beginning of such calendar quarter until and including the Termination
         Date.

                 "Person" shall mean any natural person, association, joint
         venture, trust, partnership, limited liability company, corporation or
         other legal entity.

                 "Production Payment" is defined in Section 3.1 of this 
         Assignment.

                 "Production Payment Period" shall mean the period from the
         Effective Date until and including the Termination Date.

                 "Production Sales Contracts" shall mean all contracts,
         agreements and arrangements for the sale or disposition of Subject
         Hydrocarbons that may be produced from or attributable to the Subject
         Interests, whether presently existing or hereafter created.

                 "Purchase Agreement" means the Purchase and Sale Agreement
         between Grantor and Grantee dated as of January 1, 1997.

                 "Subject Hydrocarbons" shall mean that portion of the oil, gas
         and other minerals in and under and that may be produced, from and
         after the Effective Date, from or attributable to the Subject
         Interests and after deducting the appropriate share of all royalties
         and any overriding royalties, production payments (except the





                                      C-3
<PAGE>   29
         Production Payment) and other similar charges burdening the Subject
         Interests on the Effective Date.  There shall not be included in the
         Subject Hydrocarbons any oil, gas or other minerals unavoidably lost
         in production or used by Grantee in conformity with good oil field
         practices for production operations (including without limitation,
         fuel, secondary or tertiary recovery) conducted solely for the purpose
         of producing Subject Hydrocarbons from the Subject Interests, but only
         so long as such Subject Hydrocarbons are so used.

                 "Subject Interests" is defined in Section 2.1.

                 "Termination Date" shall mean the day on which the total
         volume of Subject Hydrocarbons produced, saved and sold from and after
         the Effective Date equals a volume of 16,130.6 MMCF of gas (net to
         Grantee, using a conversion of 6 MCF/barrel of liquid production);
         provided that such volume shall be decreased by an amount, if any,
         equal to the aggregate volume of Subject Hydrocarbons which are
         attributable to Excluded Assets or Title Defect (as such terms are
         defined in the Purchase Agreement).


                 "Wells" is defined in Section 2.1(a).

         1.2     References and Titles.  All references in this Assignment to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Assignment
unless expressly provided otherwise.  Titles appearing at the beginning of any
of such subdivisions are for convenience only and shall not constitute part of
such subdivisions and shall be disregarded in construing the language contained
in such subdivisions.  The words "this Assignment", "this instrument",
"herein", "hereof", "hereby", "hereunder" and words of similar import refer to
this Assignment (and reservation of Production Payment) as a whole and not to
any particular subdivision unless expressly so limited.  Words in the singular
form shall be construed to include the plural and vice versa, unless the
context otherwise requires.  All references in this Assignment to exhibits
refer to exhibits to this Assignment unless expressly provided otherwise, and
all such exhibits are hereby incorporated herein by reference and made a part
hereof for all purposes.

                                   ARTICLE 2

                                   ASSIGNMENT

         2.1     For and in consideration of Ten Dollars ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Grantor does hereby GRANT, BARGAIN, SELL, TRANSFER,
ASSIGN, and CONVEY unto Grantee, its successors and assigns, all of the
following (the "Subject Interests"):

                 (a)      All right, title and interest of Grantor in and to
         the oil and gas leases described in Exhibit "A" (attached hereto and
         made a part hereof for all purposes), including any royalty,
         overriding royalty or other interests owned by Grantor in such leases,
         insofar and only insofar as said leases cover (i) the lands described
         in Exhibit A and (ii) the zone,





                                      C-4
<PAGE>   30
         horizon or interval wells described in Exhibit "B" (attached hereto
         and made a part hereof for all purposes) for each of the wells
         described in Exhibit B (the above described interest in such leases
         being herein called the "Leases" and the above described wells being
         herein called the "Wells");

                 (b)      All right, title and interest of Grantor in and to,
         or derived from, the following, insofar and only insofar as same are
         attributable to the Leases and the Wells:

                          (i)     All presently existing and valid oil, gas or
         mineral unitization, pooling, operating and communitization
         agreements, declarations and orders affecting the Leases and Wells,
         and in and to the properties covered and the units created thereby
         (the "Unitization and Pooling Agreements");

                          (ii)    The personal property and fixtures that are
         appurtenant to the Leases, or the Wells, or the Units, including all
         wells, casing, tubing, pumps, separators, tanks, lines and other
         personal property and oil field equipment on such Leases or Units (the
         "Personal Property");

                          (iii)   All presently existing and valid gas sales,
         purchase, gathering and processing contracts and operating agreements,
         joint venture agreements, partnership agreements, rights of way,
         easements, permits and surface leases and other contracts, agreements
         and instruments, only in relevant part to the extent and insofar as
         the same are appurtenant to the Leases, Wells and interests conveyed
         in the Units; provided, however, that Grantor retains its right, title
         and interest in and to those interests set forth in Sections
         2.1(b)(i), (ii) and (iii), to the extent such interests pertain to any
         property owned by Grantor that is not associated with the Leases and
         Wells (the "Agreements");

reserving to Grantor, however, the Production Payment and the other rights
reserved herein, as provided in Article 3 below; to have and to hold the
Subject Interests forever.  Notwithstanding the provisions of Section
2.1(b)(i), Grantee shall have no right or interest in any well that is not
specifically described on Exhibit "B" or in the production from any such well.
Grantor has warranted title to the Subject Interests pursuant to the terms of
the Purchase Agreement, and the Purchase Agreement and Section 4.8 of this
Assignment set forth the exclusive remedy for breach of such warranty of title.

                                   ARTICLE 3

                                  RESERVATIONS

         3.1     Production Payment.  Grantor does hereby reserve unto itself,
and its successors and assigns, from this Assignment a production payment
payable out of and only from Subject Hydrocarbons equal to 100 percent of the
Net Profits derived from the Subject Interests; such production payment to be
effective during the Production Payment Period and such payments not to exceed,
in any Payment Period, the Gross Proceeds produced during such period, (the
"Production Payment"); and in each case as defined herein and subject to the
terms and conditions contained herein.





                                      C-5
<PAGE>   31
         3.2     Surface and Other Use. Grantor reserves unto itself, and its
successors and assigns, from this Assignment the right to use as much of the
surface of the acreage covered by the Leases as may be necessary in the conduct
of operations in those zones, formations and depths not assigned to Grantee
herein and on other property owned or leased by Grantor.  Grantor further
reserves the right to drill through the depths, zones and formations herein
assigned to Grantee in conducting any operations in the depths, zones and
formations not assigned herein or on other property owned or leased by Grantor,
and also the right to drill, produce, operate and maintain infill wells as
permitted by regulatory agencies having jurisdiction over such matters.
Grantor reserves the right to jointly use any easements and rights-of-way for
its operations on the land covered hereby or on other lands in the area.
Grantor shall protect, defend, indemnify and hold Grantee, its agents,
employees, representatives, successors and assigns harmless from and against
any and all claims, demands, causes of action, losses and liabilities, arising
out of the exercise by Grantor, its successors and assigns of the rights
reserved in this Section 3.2.  THIS INDEMNITY SHALL INCLUDE ANY LOSSES ARISING
OUT OF THE SOLE, JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENCE (BUT NOT GROSS
NEGLIGENCE) OF ANY INDEMNIFIED PARTY, AND TO ANY LOSSES INCURRED BY ANY
INDEMNIFIED PARTY AS A RESULT OF ANY STATUTE, RULE, REGULATION OR THEORY OF
STRICT LIABILITY.

         3.3     Reversion Interest after Full Production Date.  Grantor
reserves unto itself, and its successors and assigns, an undivided 90% interest
in and to the Subject Interests from and after the Full Production Date (the
"Reversion Interest"). If the Full Production Date is reached, and the Leases
or Wells, or any part thereof, are not covered by an existing joint operating
agreement, Grantor and Grantee agree to enter into a mutually acceptable Joint
Operating Agreement to govern operation of the Subject Interests after the Full
Production Date, such joint operating agreement to be in form and substance
similar to the Model Form Operating Agreement typically used by Grantor at the
Full Production Date, naming Grantor as Operator.  Notwithstanding any other
provision of this Assignment, the Reversion Interest, if it has not heretofore
reverted, shall revert to Grantor no later than twenty-one (21) years after the
death of the last survivor of the heirs of  Joseph P. Kennedy, father of the
former President of the United States living at the time of execution of this
Agreement, it being the intention of the parties that the Reversion Interest
vest in Grantor within the time prescribed by the rule against perpetuities.

                                   ARTICLE 4

                         PRODUCTION PAYMENT ACCOUNTING
                                  AND PAYMENT

         4.1     Establishment of Net Profits Account.  Grantee shall establish
and maintain a Net Profits Account (herein called the "Net Profits Account") in
accordance with the various provisions of this Assignment and at all times
during the Production Payment Period shall keep true and correct books and
records with respect thereto.  Such books and records shall be open for
inspection and copying by the Grantor and its accountants and representatives.

         4.2     Credits to Net Profits Account.  Except as otherwise provided
herein, the Net Profits Account shall be credited with an amount equal to the
sum of Credit Payment Amounts, Gross Proceeds and Other Income.





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                 (a)      "Gross Proceeds" shall mean, on an accrual accounting
         basis, all consideration received, directly or indirectly, for sales
         of Subject Hydrocarbons, subject to the following:

                          (1)     If a controversy exists (whether by reason of
                 any statute, order, decree, rule, regulation, contract, or
                 third party claim) as to the correct or lawful sales price of
                 any Subject Hydrocarbons, then amounts received by Grantee and
                 promptly deposited by it into a mutually acceptable interest
                 bearing escrow account pending settlement of such controversy
                 shall not be considered to have been received by Grantee and
                 shall not be included in Gross Proceeds until such controversy
                 is resolved, but all such amounts, other than interest accrued
                 on the escrowed funds, thereafter paid to Grantee by the
                 escrow agent out of or on account of such escrow shall be
                 considered to be amounts received from the sale of Subject
                 Hydrocarbons.  However, amounts so received by Grantee and not
                 deposited in such escrow account shall be considered to be
                 received for purposes of this definition of Gross Proceeds;

                          (2)     Gross Proceeds relating to any non-consent
                 operations conducted with respect to all or any part of the
                 Subject Interests after the Effective Date shall be subject to
                 Section 5.8;

                          (3)     Gross Proceeds shall not include any amount
                 which Grantee shall receive as a bonus for any lease or
                 payments made to Grantor in connection with adjustment of the
                 cost of any Well and leasehold equipment upon unitization or
                 revision of participating areas under federal divided-type
                 units covering any of the Subject Interests;

                          (4)     Amounts received by Grantee from a purchaser
                 of Subject Hydrocarbons (i) as a prepayment of any portion of
                 the sales price for such Subject Hydrocarbons, (ii) as advance
                 gas payments or (iii) as payments pursuant to contractual
                 provisions providing for "take-or-pay" payments (including
                 amounts awarded by a court or agreed to by the parties in any
                 settlement of a claim net of costs and attorneys' fees
                 incurred in connection therewith as damages for the failure or
                 refusal of the purchaser to take Subject Hydrocarbons pursuant
                 to the contract which contains such provisions) shall be
                 considered to be received from the sale of Subject
                 Hydrocarbons during periods commencing with the Effective
                 Date; provided that such amounts shall not be considered
                 received from the sale of Subject Hydrocarbons at a later date
                 when Subject Hydrocarbons are delivered in respect of any such
                 payments under "make-up" or similar provisions;

                          (5)     Cash settlements and cash make-ups received
                 by Grantee with respect to the Subject Interests under gas
                 balancing or similar agreements shall be considered derived
                 from the sale of Subject Hydrocarbons; and





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<PAGE>   33
                          (6)     Gross Proceeds shall not include Other Income.

         (b)     "Other Income" shall mean, on an accrual accounting basis, the
following:

                          (1)     The proceeds received by Grantee from the
                 sale, after the Effective Date, of any materials, supplies,
                 equipment and other personal property or fixtures, or any part
                 thereof or interest therein, located on or used in connection
                 with the Subject Interests (including without limitation all
                 amounts attributable thereto which are received by Grantee by
                 way of conformance of investment in personal property and
                 equipment if the Subject Interests or any part or parts
                 thereof are hereafter from time to time unitized or are
                 affected by the revision of a participating area in a federal
                 divided-type unit);

                          (2)     The proceeds of all insurance received by
                 Grantee (i) the cost of which is charged to the Net Profits
                 Account, directly or indirectly, and/or (ii) that accrue to
                 Grantee as a consequence of the loss or damage to any one or
                 more of the following which occurs after the Effective Date:
                 the Subject Interests, or any part thereof or interest
                 therein, the interest of Grantee in any materials, supplies,
                 equipment or other personal property or fixtures located on or
                 used in connection with any of the Subject  Interests, or any
                 Subject Hydrocarbons; except to the extent such amounts are
                 used to repair or replace the items damaged or lost giving
                 rise to the receipt of such amounts;

                          (3)     The proceeds of all judgments and claims
                 received by Grantee for damages to one or more of the
                 following which occurs after the Effective Date:  the Subject
                 Interests, or any part thereof or interest therein, any
                 materials, supplies, equipment or other personal property or
                 fixtures, or any part thereof or interest therein, located on
                 or used in connection with any of the Subject Interests, or
                 any Subject Hydrocarbons; except to the extent such amounts
                 are used to repair or replace the items damaged or lost giving
                 rise to the receipt of such amounts;

                          (4)     All proceeds of and/or from each of the
                 following amounts received by Grantee (to the extent
                 attributable to periods after the Effective Date) with respect
                 to the Subject Interests:  (i) delay rentals, (ii) lease
                 bonuses, (iii) rentals from reservoir use or storage, and (iv)
                 payments in connection with adjustment of the cost of any Well
                 and leasehold equipment upon unitization or revision of
                 participation areas under federal divided-type units covering
                 any of the Subject Interests;

                          (5)     Any interest, penalty or other amounts
                 received by Grantee which are attributable to the Subject
                 Interests and are not derived from the sale of Subject
                 Hydrocarbons;





                                      C-8
<PAGE>   34
                          (6)     All other monies and things of value which
                 are received by Grantee by virtue of the ownership after the
                 Effective Date of the Subject Interests and the materials,
                 supplies, equipment and other personal property and fixtures
                 located on or used in connection with the Subject Interests;
                 and

                          (7)     Interest on proceeds escrowed under Section 
                 4.2(a)(1) above.

         4.3     Debits to Net Profits Account.  Except as otherwise provided
herein the Net Profits Account shall be debited (without duplication), on an
accrual accounting basis, with the following amounts:

                 (a)      All direct costs which are attributable to production
         (excluding depletion, depreciation and amortization) of the Subject
         Interests (i) for all direct labor (including fringe benefits) and
         other services necessary for developing, operating, producing,
         reworking and maintaining the Subject Interests after the Effective
         Date, (ii) for dehydration, compression, separation, transportation
         and marketing of the Subject Hydrocarbons after the Effective Date,
         and (iii) for all materials, supplies, equipment and other personal
         property and fixtures purchased for use on, or in connection with, any
         of the Subject Interests after the Effective Date (including without
         limitation (A) all amounts paid by Grantee for conformance of
         investment if the Subject Interests or any part or parts thereof are
         hereafter from time to time unitized or if any participating area in a
         federal divided-type unit is changed, and (B) the cost of secondary
         recovery, pressure maintenance, repressuring, recycling and other
         operations conducted for the purpose of enhancing oil production);

                 (b)      Costs (including without limitation outside legal,
         accounting and engineering services) attributable to the Subject
         Interests of (i) handling, investigating and/or settling litigation,
         administrative proceedings and claims (including without limitation
         lien claims other than liens for borrowed funds) and (ii) payment of
         judgments, penalties and other liabilities (including interest
         thereon), paid by Grantee (and not reimbursed under insurance
         maintained by Grantee or others) and involving any of the Subject
         Interests, or incident to the development, operation or maintenance of
         the Subject Interests after the Effective Date, or requiring the
         payment or restitution of any proceeds of Subject Hydrocarbons, or
         arising from tax or royalty audits, except that there shall not be
         debited to the Net Profits Account any expenses incurred by Grantee in
         litigation of any claim or dispute arising hereunder between Grantee
         and Grantor or amounts paid by Grantee to Grantor pursuant to a final
         order entered by a court of competent jurisdiction resolving any such
         claim or dispute or amounts paid by Grantee to Grantor in connection
         with the settlement of any such claim or dispute;

                 (c)      All taxes (except federal and state income, transfer,
         mortgage, inheritance, estate, franchise and like taxes) paid by
         Grantee with respect to the ownership of the Subject Interests or the
         extraction of the Subject Hydrocarbons after the Effective Date,
         including without limitation production, severance, and/or excise





                                      C-9
<PAGE>   35
         and other similar taxes assessed against, and/or measured by, the
         production of (or the proceeds or value of production of) Subject
         Hydrocarbons (without regard to the period of ownership for which such
         taxes are assessed), occupation taxes, sales and use taxes, and ad
         valorem taxes assessed against or attributable to the Subject
         Interests or any equipment used in connection with production from any
         of the Subject Interests;

                 (d)      Insurance premiums attributable to the ownership or
         operation of the Subject Interests paid by Grantee for insurance
         actually carried for periods after the Effective Date with respect to
         the Subject Interests, or any equipment located on any of the Subject
         Interests, or incident to the development, operation or maintenance of
         the Subject Interests after the Effective Date;

                 (e)      All amounts attributable to the Subject Interests (to
         the extent attributable to periods after the Effective Date) and
         consisting of (i) rent and other consideration paid for the use or
         damage to the surface and (ii) delay rentals, shut-in well payments,
         minimum royalties and similar payments paid pursuant to the provisions
         of agreements in force and effect before the Effective Date;

                 (f)      Amounts attributable to the Subject Interests (and
         attributable to periods after the Effective Date) and charged by the
         relevant operator as overhead charges specified in applicable
         operating agreements now or hereafter covering the Subject Interests;

                 (g)      If as a result of the occurrence of the bankruptcy or
         insolvency or similar occurrence of the purchaser of Subject
         Hydrocarbons any amounts previously included in Gross Proceeds or
         Other Income are reclaimed from Grantee or its representative, then
         the amounts reclaimed as promptly as practicable following Grantee's
         payment thereof;

                 (h)      If Grantee shall be a party as to any non-consent
         operations conducted with respect to all or any of the Subject
         Interests after the Effective Date, all costs to be debited to the Net
         Profits Account with respect thereto shall be governed by Section 5.8;

                 (i)      The Management Fee (as defined in the Management
         Agreement) paid pursuant to the Management Agreement; and

                 (j)      Except as otherwise provided elsewhere in this
         Assignment, all other direct expenditures attributable to the Subject
         Interests paid by Grantee after the Effective Date for the necessary
         or proper development, operation, maintenance and administration,
         after the Effective Date, of the Subject Interests, if reasonably
         incurred; provided, however, that notwithstanding anything herein
         provided to the contrary, the Net Profits Account shall not be debited
         with any cost or expense which is deducted or taken into account in
         determining Gross Proceeds or Other Income,





                                      C-10
<PAGE>   36
         including, without limitation, the value of any component of Gross
         Proceeds or Other Income.

         4.4     Accounting for Net Profits.  All debits to the Net Profits
Account calculated pursuant to Section 4.3 which are attributable to costs and
expenses paid by Grantee during a Payment Period, up to and including the last
day of such Payment Period, shall be debited against the Net Profits Account as
of the last day of such period.  All credits to the Net Profits Account
calculated pursuant to Section 4.2 which are actually received by or on behalf
of Grantee during a Payment Period up to and including the last day of such
Payment Period shall be credited to the Net Profits Account as of the last day
of such Payment Period.

         4.5     Measurement Amount and Payment of Production Payment.  As of
the end of each Payment Period, the Grantee shall calculate, or cause to be
calculated, an amount (the "Measurement Amount"), being the sum of (a) any
Measurement Amount carried forward from a prior Payment Period; and (b) the Net
Profits for the then current Payment Period.  Not more than 75 days following a
Payment Period the Grantee shall cause the Grantor to be paid the lesser of (i)
the Measurement Amount for such Payment Period or (ii) Gross Proceeds for the
Payment Period in question.  If the Measurement Amount for a Payment Period is
a negative amount, no payment shall be due and payable by Grantee to Grantor
for a Production Payment hereunder for such Payment Period, and the negative
amount shall be carried forward to the next Payment Period.  If the Measurement
Amount for the Payment Period is a positive amount and exceeds Gross Proceeds
for the Payment Period, the excess Measurement Amount shall be carried forward
to the next Payment Period.  The Grantee shall send at the same time a
statement showing the calculation of the amount of the Production Payment, if
any, or the reason for any nonpayment, and clearly reflecting the condition of
the Net Profits Account as of the close of business on the last day of the
relevant Payment Period and clearly reflecting (with sufficient description so
that Grantor can identify such items and the particular Subject Interest
involved) those items which gave rise to debits and credits to the Net Profits
Account during such Payment Period and clearly reflecting for each Subject
Interest the quantities of Subject Hydrocarbons produced therefrom during the
Payment Period covered by such statement, the volumes of such production sold,
the prices at which such volumes were sold, and the taxes paid with respect to
such sales.

                 4.6      Escrow in the Event of Tax Audit.   In the course of 
an  audit of the federal income tax returns of Grantee or an Affiliate of
Grantee (a "Tax Audit"), promptly following the earlier to occur of (a) the date
the IRS raises in writing an issue involving (i) the eligibility of the gas
production from the Subject Interests for credits pursuant to IRC Section 29 or
(ii) Grantee's ownership of the Subject Interests for federal income tax
purposes (either such issue being referred to herein as a "Tax Issue") or (b)
the date of issuance by the IRS of a statutory notice of deficiency involving a
Tax Issue, (such earlier date, the "Escrow Commencement Date"), Grantor and
Grantee shall enter into an Escrow Agreement with an escrow agent, substantially
in the form of Exhibit C attached hereto. The Escrow Agreement and the funds in
the "Escrow Account" established pursuant thereto shall be administered in
accordance with the following provisions:

                 (a)      Beginning with the Payment Period in which the Escrow
         Commencement Date occurs and continuing for each Payment Period until
         the "Conclusion of a Tax Audit"





                                      C-11
<PAGE>   37
         (as that term is defined below, with such period of time being the
         "Escrow Period"), Grantor  shall deposit into the Escrow Account the
         amount by which the Credit Payment Amount for such Payment Period
         would be reduced if all open Tax Issues were sustained in favor of the
         IRS (the "Escrow Amount" and the sum of all Escrow Amounts being the
         "Escrowed Funds").  The Escrowed Funds shall not include any funds
         which were due from Grantee to Grantor prior to the Escrow
         Commencement Date, but which were not paid to Grantor.  For tax
         purposes only, Grantor shall be treated as the owner of the Escrowed
         Funds.

                 (b)      A Tax Audit will be deemed to have concluded upon the
         earliest to occur of the following events with respect to each Tax
         Issue:  (i) the receipt by Grantee of written notice from the IRS that
         it will not assert any adjustments with respect to the Tax Issue; (ii)
         Grantee entering into a settlement agreement with the IRS which
         resolves the open Tax Issue; (iii) a judgment of a court of law or a
         decision in an administrative proceeding becoming non-appealable with
         respect to the open Tax Issue; or (iv) the expiration of the
         applicable period of limitations for making assessments with respect
         to the years under examination in the Tax Audit if the IRS has made no
         assessments within such period with respect to the open Tax Issue
         (such earliest event being deemed the "Conclusion of a Tax Audit").

                 (c)      At the Conclusion of a Tax Audit, Grantee and Grantor
         agree to recalculate, pursuant to the provisions of this Section
         4.6(c), any amounts due Grantee and Grantor pursuant to the terms of
         this Assignment for the Escrow Period, taking into account the
         reduction, if any, in the Credit Payment Amounts due for each Payment
         Period during the Escrow Period resulting from the Tax Issues
         sustained in favor of the IRS in the Tax Audit (including any
         settlement described in Section 4.7).  Grantee shall receive from the
         Escrowed Funds an amount equal to 75% of the total dollar amount of
         any reduction in Tax Credits available to Grantee with respect to
         hydrocarbon production from the Wells as a result of the application
         of the preceding sentence, including interest thereon, for the periods
         on or after the Escrow Commencement Date.  Except for such adjustment,
         there is no other obligation of Grantor to make any other payment to
         Grantee with respect to the Tax Audit, subject to Section 4.8 below.
         Grantor shall receive all remaining Escrowed Funds related to the Tax
         Issues resolved in the Tax Audit, including interest thereon.  If in
         the course of a Tax Audit, a Tax Issue is resolved, a portion of the
         Escrowed Funds properly allocable to such Tax Issue will be
         distributed in accordance with the principles of this Section 4.6.

                 4.7      Settlements Resulting from a Tax Audit.  Grantee
shall make a reasonable attempt to prevail on any Tax Issue.  If Grantee elects
to enter into a negotiated settlement with the IRS of any Tax Issue, Grantee
shall, in good faith, consult with Grantor regarding the suggested terms of
such settlement; provided, however, that Grantee shall be under no obligation
to comply with any suggestion of Grantor.  Grantee shall provide to Grantor
copies of all correspondence or pleading between Grantee and the IRS regarding
any Tax Audit.  Grantor shall be entitled to monitor all hearings and meetings
with the IRS associated with such settlement negotiations.

                 4.8      Overpayments. If at any time Grantee is determined to
have credited to the Net Profits Account more than the amount then due with
respect to any Credit Payment Amount as





                                      C-12
<PAGE>   38
a result of a breach by Grantor of its representations and warranties in the
Purchase Agreement or otherwise, Grantor shall be obligated to return any such
overpayment, limited to amounts actually paid to Grantor by Grantee, including
interest on such amounts at the prime rate of interest in effect during the
time period of the overpayment at The Chase Manhattan Bank, N.A. (or any
successor bank, or if such bank does not exist, the United States prime rate
generally recognized in the financial media from time to time), within ten (10)
days after Grantee notifies Grantor of the amount of such overpayment and
interest and provides Grantor substantiation thereof.  Alternatively, Grantee
may elect to offset the amount of any such overpayment and interest thereon as
set forth in the immediately preceding sentence against future Credit Payment
Amounts.  The payment provided pursuant to this Section 4.8 shall constitute
Grantee's exclusive remedy with respect to the overpayment of Credit Payment
Amounts and breach of the representations and warranties in Section 7.23 of the
Purchase Agreement, but shall not otherwise limit Grantee's rights and remedies
with respect to any breach by Grantor of its representations and warranties in
the Purchase Agreement other than those in Section 7.232 thereof.

                                   ARTICLE 5

                         OPERATION OF SUBJECT INTERESTS

                 5.1      Rights and Duties of Grantee.  Grantee (subject to
the terms and provisions of any applicable operating agreements and subject to
the other provisions of this Assignment and the Management Agreement), as
between Grantor and Grantee, has exclusive charge, management and control of
all operations to be conducted on the Subject Interests and may take any and
all actions which a reasonably prudent operator would deem necessary or
advisable in the management, operation and control thereof.  Grantee shall
promptly (and, unless the same are being contested in good faith and by
appropriate proceedings, before the same are delinquent) pay all costs and
expenses (including without limitation all taxes and all costs, expenses and
liabilities for labor, materials and equipment incurred in connection with the
Subject Interests and all obligations to the holders of royalty interests and
other interests affecting the Subject Interests) incurred from and after the
Effective Date in developing, operating and maintaining the Subject Interests.
Grantee shall be obligated to operate and maintain the Subject Interests as
would a reasonable and prudent operator under similar circumstances.  As to
those of the Subject Interests as to which Grantee is not the operator, Grantee
shall take all such action and exercise all such rights and remedies as are
reasonably available to it to cause the operator to so maintain and operate
such Subject Interests.  Grantee shall be deemed to have fully discharged all
of its obligations under this Section 5.1, and shall have no liability to
Grantor under this Section 5.1 during any period when the Management Agreement
is in effect and Grantee is in compliance with the Management Agreement in all
material respects.

                 5.2      Sales of Subject Hydrocarbons.  Grantee shall have
the obligation to market or cause to be marketed the Subject Hydrocarbons in
accordance with its good faith business judgment and sound oil field practices.
Grantee shall fully discharge all of its obligations under this Section 5.2,
and shall have no liability to Grantor under this Section 5.2 during any period
when the Management Agreement is in effect and Grantee is in compliance with
the Management Agreement in all material respects.  As to any third parties,
all acts of Grantee in marketing the Subject Hydrocarbons and all Production
Sales Contracts executed by Grantee shall be binding on Grantor





                                      C-13
<PAGE>   39
and the Production Payment; it being understood that the right and obligation
to market the Subject Hydrocarbons is at all times vested in Grantee and
Grantor does not have any such right or obligation or any possessory interest
in all or part of the Subject Hydrocarbons, except as may be granted by
separate agreement or instrument.  Accordingly, it shall not be necessary for
Grantor to join in any separate Production Sales Contracts or any amendments to
existing Production Sales Contracts.

                 5.3      Insurance.  Grantee shall obtain or cause to be
obtained (and maintain or cause to be maintained during the economic life of
the Subject Interests) the types of insurance as in its reasonable good faith
business judgment a reasonable and prudent operator would carry under similar
circumstances.  Grantee shall fully discharge all of its obligations under this
Section 5.3, and shall have no liability to Grantor under this Section 5.3
during any period when the Management Agreement is in effect and Grantee is in
compliance with the Management Agreement in all material respects.

                 5.4      Contracts with Affiliates.  To the extent not
provided for in any applicable operating agreement, Grantee may perform
services and furnish supplies and equipment with respect to the Subject
Interests, provided that the amount of compensation, price or rental that can
be charged to the Net Profits Account therefor must be no less favorable than
those available from Non-Affiliates in the area engaged in the business of
rendering comparable services or selling or leasing comparable equipment and
supplies which could reasonably be made available to the Subject Interests.

                 5.5      Government Regulation.  All obligations of Grantee
hereunder shall be subject to and limited by all applicable federal, state and
local laws, rules, regulations and orders (including those of any applicable
agency, board, official or commission having jurisdiction).

                 5.6      Abandonments.  Prior to releasing, surrendering or
abandoning any portion of the Subject Interests, Grantee shall first offer in
writing to reassign such interest to Grantor, with Grantor assuming all
liability and obligations for such interest after such assignment.  If Grantor
does not accept the offer to reassign within 60 days from such offer, Grantee
shall have the right without the joinder of Grantor to release, surrender
and/or abandon its interest in the Subject Interests, or any part thereof, or
interest therein even though the effect of such release, surrender or
abandonment will be to release, surrender or abandon the Production Payment the
same as though Grantor had joined therein insofar as the Production Payment
covers the Subject Interests, or any part thereof or interest therein, so
released, surrendered or abandoned by Grantee.

                 5.7      Pooling and Unitization.

                 (a)      Certain of the Subject Interests may have been pooled
         or unitized for the production of oil, gas and/or minerals prior to
         the Effective Date or, after the Effective Date, may be so pooled or
         unitized pursuant to Section 5.7(b).  Such Subject Interests are and
         shall be subject to the terms and provisions of such pooling and
         unitization agreements, and the Production Payment in each such
         Subject Interest shall apply to (and the term "Subject Hydrocarbons"
         shall include) the production from such Units which is attributable to
         such Subject Interest (and the Net Profits Account shall be computed
         giving consideration to such





                                      C-14
<PAGE>   40
         production and costs, expenses, charges and credits attributable to
         such Subject Interest) under and by virtue of the applicable pooling
         and unitization agreements.

                 (b)      Grantee shall have the right and power to unitize,
         pool or combine the lands covered by the Subject Interests, or any
         portion or portions thereof, with any other land or lease or leases so
         as to create one or more unitized areas (or, with respect to unitized
         or pooled areas theretofore created, to dissolve the same or to amend
         and/or reconfigure the same to include additional acreage or
         substances or to exclude acreage or substances).  If pursuant to any
         law, rule, regulation or order of any governmental body or official,
         any of the Subject Interests are pooled or unitized in any manner, the
         Production Payment insofar as it affects such Subject Interest shall
         also be deemed pooled and unitized, and in any such event the
         Production Payment shall apply to (and the term "Subject Hydrocarbons"
         shall include) the production which accrues to such Subject Interest
         under and by virtue of such pooling and unitization arrangements and
         the Net Profits Account shall be computed giving consideration to such
         production and costs, expenses, charges and credits attributable to
         such Subject Interest under and by virtue of such pooling and
         unitization arrangement.  Notwithstanding the foregoing provisions of
         Section 5.7(b), Grantee shall have no right or interest in any Well
         that is not specifically described on Exhibit "B" or in the production
         from any such Well.

         5.8     Non-consent Operations.

                          (a)     If Grantee elects (subject to Section 5.1) to
         be a non-participating party (whether pursuant to an operating
         agreement or other agreement or arrangement, including without
         limitation, non-consent rights and obligations imposed by statute or
         regulatory agency) with respect to any operation on any Subject
         Interest or elects to be an abandoning party with respect to a Well
         located on any Subject Interest, the consequence of which election is
         that Grantee's interest in such Subject Interest or part thereof is
         temporarily (i.e., during a recoupment period) or permanently
         forfeited to the parties participating in such operations, or electing
         not to abandon such Well, then the costs and proceeds attributable to
         such forfeited interest shall not, for the period of such forfeiture
         (which may be a continuous and permanent period), be debited or
         credited to the Net Profits Account and such forfeited interest shall
         not, for the period of such forfeiture, be subject to the Production
         Payment.

                 (b)      If Grantee elects (subject to Section 5.1) to be a
         participating party to such an operation, or elects to be a
         non-abandoning party with respect to such a Well, and any other party
         or parties have elected not to participate in such operation (or have
         elected to abandon such Well) with the result that (pursuant to an
         operating agreement or other agreement or arrangement, including
         without limitation, non-consent rights and obligations imposed by
         statute and/or regulatory agency) Grantee becomes entitled to receive,
         either temporarily (i.e., through a period of recoupment) or
         permanently, interests belonging to such other party or parties, then
         the costs and proceeds attributable to such non-participating parties'
         interests to which Grantee becomes so obligated and entitled shall be
         debited and credited to the Net Profits Account as though such
         interests were part of the Subject Interests.





                                      C-15
<PAGE>   41
         5.9     Renewals and Extensions of Leases.  The Production Payment
shall apply to all renewals, extensions and other similar arrangements (and/or
interests therein) of or with respect to any Lease which is included in the
Subject Interests, whether or not such renewals, extensions or arrangements
have heretofore been obtained by Grantor, or Grantor's predecessors in title,
or are hereafter obtained by Grantee as well as to each new lease covering any
minerals covered by one or more of the Leases (but only to the extent such
minerals were covered by a Lease) if same are taken or acquired while the
relevant Lease is in force and effect or within one year after the lapse
thereof.

                                   ARTICLE 6

                        GRANTOR LIABILITY AND EQUIPMENT

         6.1     No Personal Liability of Grantor.  NOTWITHSTANDING ANYTHING TO
THE CONTRARY CONTAINED IN THIS ASSIGNMENT, GRANTOR SHALL NOT, BY VIRTUE OF THE
PRODUCTION PAYMENT RESERVED IN THIS ASSIGNMENT, PERSONALLY BE RESPONSIBLE FOR
PAYMENT OF ANY PART OF THE COSTS, EXPENSES OR LIABILITIES INCURRED IN
CONNECTION WITH EXPLORING, DEVELOPING, OPERATING, OWNING AND/OR MAINTAINING THE
SUBJECT INTERESTS; PROVIDED, HOWEVER, ALL SUCH COSTS, EXPENSES AND LIABILITIES
SHALL, TO THE EXTENT THE SAME RELATE TO PERIODS AFTER THE EFFECTIVE DATE,
NEVERTHELESS BE CHARGED AGAINST THE NET PROFITS ACCOUNT AS AND TO THE EXTENT
HEREIN PERMITTED.

         6.2     Ownership of Equipment.  The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests and is exclusively an interest in Net
Profits, as herein defined and provided for, and Grantor shall look exclusively
to the Subject Hydrocarbons for the satisfaction and realization of the
Production Payment.

                                   ARTICLE 7

                                   TRANSFERS

         7.1     Assignments by Grantee.  Upon prior written notice to Grantor,
Grantee shall have the right to transfer at any time and from time to time all
or any portion of the Subject Interests, provided, however, that (i) the
Subject Interests shall at all times be subject to this Assignment, the
Production Payment, the Option (as defined in the Purchase Agreement) and the
Management Agreement, and (ii) if such transfer or transfers result in less
than all of the Subject Interests being transferred to and held by the same
Person, Grantee shall retain the obligation to administer and pay the
Production Payment in accordance with the provisions hereof in the same manner
as if the Production Payment were held by a single Person.  Any such assignment
shall not release Grantee from any obligation to Grantor under the Purchase
Agreement or this Assignment arising prior to the date of transfer.
Notwithstanding the foregoing Grantee shall not transfer all or any portion of
the Subject Interests to a Person which is  not an Affiliate of Grantee without
the prior written consent of Grantor which consent shall not be unreasonably
withheld, conditioned or delayed.





                                      C-16
<PAGE>   42
         7.2     Assignments by Grantor.  Grantor shall not transfer all or any
portion of the Production Payment without the prior written consent of Grantee
which consent shall not be unreasonably withheld, conditioned or delayed.  Any
such assignment shall not release Grantor of any obligation under the Purchase
Agreement or Management Agreement.

         7.3     Change in Ownership of Production Payment.  No change of
ownership or right to receive payment of the Production Payment, or of any part
thereof, however accomplished shall be binding upon Grantee until notice
thereof shall have been furnished by the person claiming the benefit thereof,
and then only with respect to payments thereafter made.  Notice of sale or
assignment shall consist of a copy of the recorded instrument accomplishing the
same or if there be no recorded instrument then a copy of the applicable
document accomplishing same; notice of change of ownership or right to receive
payment accomplished in any other manner (for example by reason of incapacity,
death or dissolution) shall consist of copies of recorded documents and
complete proceedings legally binding and conclusive of the rights of all
parties.  Until such notice shall have been furnished to Grantee as provided
above, the payment or tender of all sums payable on the Production Payment and
delivery of all notices may be made in the manner provided herein precisely as
if no such change in interest or ownership or right to receive payment had
occurred.  The kind of notice herein provided shall be exclusive, and no other
kind, whether actual or constructive, shall be binding on Grantee.

                                   ARTICLE 8

                                 MISCELLANEOUS

         8.1     Governing Law.  Except to the extent the terms hereof are
governed mandatorily by the real property laws of the states in which the
Subject Interests are located, the validity, effect and construction of this
Assignment shall be governed by the laws of the State of  New York.

         8.2     Intentions of the Parties.  Nothing herein contained shall be
construed to constitute either party hereto (under state law or for tax
purposes) the agent of, or in partnership with, the other party.  If, however,
the parties hereto are deemed to constitute a partnership for federal income
tax purposes, the parties elect to be excluded from the application of
Subchapter K, Chapter 1, Subtitle A of the Code and agree not to take any
position inconsistent with such election.  In addition, the parties hereto
intend that the Production Payment reserved hereby by Grantor shall at all
times be treated as an incorporeal (i.e., a non-possessory) interest in real
property or land under the laws of the state in which the Subject Interests are
located, a production payment under Section 636 of the Code, and, for tax
purposes, debt, payable out of net profits (rather than as a working or any
other interest).

         8.3     Notices.  All notices and other communications required or
permitted under this Assignment shall be in writing and, unless otherwise
specifically provided, shall be delivered personally, by prepaid telecopy or
similar means (with signed confirmed copy to follow by mail in the manner
provided below) or (except for quarterly statements provided for under Section
4.5 which may be sent by regular mail) by registered or certified mail, postage
prepaid, or by delivery service for which a receipt is obtained, at the
respective addresses shown opposite the signatures of Grantor and Grantee to
this Assignment, and shall be deemed delivered on the date of receipt.  Either
party





                                      C-17
<PAGE>   43
may specify an alternative address by giving notice to the other party, in the
manner provided in this Section 8.3.

         8.4     Further Assurances.  Grantor and Grantee agree to execute and
deliver to the other all such other and additional instruments, notices,
division orders, transfer orders and other documents and to do all such other
and further acts and things as may be necessary to more fully and effectively
grant, convey and assign to Grantee and to reserve to Grantor the rights,
titles, interest and estates conveyed to Grantee and reserved by Grantor
hereby.

         8.5     Counterparts.  This Assignment is being executed in multiple
originals, all of which are identical except that, for the convenience of
recording, counterparts hereof which are being recorded include only those
certain portions of Exhibit A and Exhibit B which include descriptions of
properties located in the recording jurisdiction in which the particular
counterpart is being recorded.  All of such counterparts together shall
constitute one and the same instrument.

         8.6     Binding Effect.  All the covenants and agreements of Grantor
and Grantee herein contained shall be deemed to be covenants running with
Grantor's and Grantee's interest in the Subject Interests and the lands
affected thereby.  All of the provisions hereof shall inure to the benefit of,
and shall be binding upon, each of the parties hereto and their respective
successors and, subject to the provisions of Article 7 and this Section 8.6,
their assigns.  Any sale, conveyance, assignment, sublease or other transfer of
the Subject Interests, or any interest therein or any part thereof, shall
provide that the assignee assumes all of the obligations of the assignor with
respect to the interest transferred.

         8.7     Partition.  Grantor and Grantee acknowledge that Grantor and
Grantee have no right or interest that would permit either to partition any
portion of the Subject Interests, and Grantor and Grantee waive any such right.

         8.8     Purchase Agreement.  This Assignment is granted pursuant to
the Purchase Agreement.  None of the provisions of this Assignment shall be
construed to diminish, limit or amend the terms of the Purchase Agreement.

         8.9     Effective Date.  This Assignment shall become effective for
all purposes as of 7:00 a.m. at the respective locations of the Subject
Interests on the Effective Date.





                                      C-18
<PAGE>   44
         IN WITNESS WHEREOF, the parties have executed this Assignment on this
2nd day of July, 1997.

                                       GRANTOR:                               
                                                                              
                                       THE HOUSTON EXPLORATION COMPANY, INC.  
                                                                              
                                                                              
                                       By:  /s/ THOMAS W. POWERS
                                          ------------------------------------
                                                Thomas W. Powers
                                                Senior Vice President 
                                                                              
                                       GRANTEE:                               
                                                                              
                                       KEYSPAN NATURAL FUEL, LLC              
                                                                              
                                                                              
                                       By:  /s/ ZAIN MIRZA
                                          ------------------------------------
                                                Zain Mirza
                                                Chief Financial Officer


                       This Assignment was Prepared by:

                               F. B Cochran III
                               Vinson & Elkins
                               1001 Fannin Street, Suite 2300
                               Houston, Texas  77002-6760



RETURN RECORDED INSTRUMENT TO:

Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas  77002-6760
Attention:  Yvonne Onak





                                      C-19
<PAGE>   45
STATE OF NEW YORK         )
                          )        ss.
COUNTY OF  KINGS          )

         The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for The Houston
Exploration Company, Inc., a Delaware corporation, on behalf of the
corporation.

         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------


(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999


STATE OF NEW YORK         )
                                  )        ss.
COUNTY OF KINGS           )

         The foregoing instrument was acknowledged before me this 2nd day of
July, 1997 by Zain Mirza as Chief Financial Officer for KeySpan Natural Fuel,
LLC, a Delaware limited liability company, on behalf of the company.

         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------

(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999





                                      C-20
<PAGE>   46
                                   EXHIBIT C
                                       TO
                        ASSIGNMENT OF OIL AND GAS LEASES
                     WITH RESERVATION OF PRODUCTION PAYMENT


                                ESCROW AGREEMENT

         This Escrow Agreement is made and entered into this ______ day of
_____________, by and between THE HOUSTON EXPLORATION COMPANY, INC. ("Seller"),
KEYSPAN NATURAL FUEL, LLC ("Buyer"), and ___________________ BANK ("Escrow
Agent").  Seller and Buyer are sometimes herein jointly referred to as the
"Parties."

                                    RECITALS

         A.      Seller and Buyer are the Seller and Buyer, respectively, under
that certain Purchase and Sale Agreement dated as of  January 1, 1997 (the
"Purchase and Sale Agreement"), and Grantor and Grantee, respectively, under
the Assignment of Oil and Gas Leases with Reservation of Production Payment
dated effective as of January 1, 1997 (the "Assignment"); and

         B.      Pursuant to Section 4.6 of the Assignment, Seller and Buyer
have agreed that Seller shall deposit Escrow Amounts, as defined therein, in an
escrow account; and

         C.      Escrow Agent has agreed to act as such in accordance with the
terms, provisions and conditions of this Escrow Agreement and to hold the funds
described herein in accordance with the terms and provisions hereof.

                                   AGREEMENT

         In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto do hereby agree as follows:

         1.      Of even date herewith, Seller has delivered to Escrow Agent
and Escrow Agent hereby acknowledges the receipt of an Escrow Amount for
deposit into the account set up hereunder (the "Escrow Account").  Seller and
Buyer have advised Escrow Agent that Seller will deliver additional Escrow
Amounts for deposit into the Escrow Account.  Such sums, together with any
interest or other earnings of the money so deposited shall be referred to
herein as the "Escrow Funds."

         2.      During the term of this Escrow Agreement, Escrow Agent shall
hold and maintain the Escrow Funds and said funds shall be invested or
reinvested by Escrow Agent at the joint written direction of Seller and Buyer.
Seller and Buyer hereby direct Escrow Agent to invest the Escrow Funds in the
_______________ Fund.





                            Exhibit C to Assignment
                                     Page 1
<PAGE>   47
         The Escrow Agent shall sell all or any designated part of such
investments so directed in writing jointly by Seller and Buyer.  All
commissions, brokerage taxes, fees and expenses, if any, applicable to the
acquisition or sale of the investments under this paragraph shall be paid
initially from the interest or income generated from the Escrow Funds and
thereafter from any remaining amounts in the Escrow Funds.  The Escrow Agent
shall not be liable for losses on any investments made by it pursuant to and in
compliance with such instructions.

         3.      The Escrow Agent shall hold and disburse the Escrow Funds
during the term of this Escrow Agreement in accordance with the written joint
instructions from Seller and Buyer.  The Escrow Agent shall deliver the Escrow
Funds or any part thereof to the party designated to receive such funds if
Escrow Agent receives written joint instructions from both Seller and Buyer to
do so.  The Escrow Agent shall hold the Escrow Funds until it has received a
joint written instruction notice from Seller and Buyer as to how delivery of
the Escrow Funds shall be made.  Should any controversy arise between Seller
and Buyer and/or the Escrow Agent with respect to this Escrow Agreement or with
respect to the right to receive the Escrow Funds, the Escrow Agent shall have
the right to consult counsel and/or to institute a bill of interpleader in any
court of competent jurisdiction to determine the rights of the Parties.  Should
such actions be necessary, or should the Escrow Agent become involved in
litigation in any manner whatsoever on account of this Escrow Agreement or the
Escrow Funds made hereunder, the Parties bind and obligate themselves, their
successors, assigns and legal representatives to pay the Escrow Agent, in
addition to any charge made hereunder for acting as Escrow Agent, reasonable
attorney's fees incurred by the Escrow Agent, and any other disbursements,
expenses, losses, costs and damages in connection with and resulting from such
actions.

         4.      (a)      The duties of the Escrow Agent are only such as are
herein specifically provided, being purely ministerial in nature, and the
Escrow Agent shall incur no liability whatsoever except for gross negligence or
willful misconduct.  The Escrow Agent is not a party to any other agreement
regarding the subject matter contained herein and as such shall only be bound
by the terms and conditions of this Escrow Agreement.

                 (b)      The Escrow Agent shall be under no responsibility for
the recitals in this Escrow Agreement, the covenants or undertakings set forth
in the Purchase and Sale Agreement, the Assignment, or in respect of any of the
items deposited with the Escrow Agent other than to comply with the specific
duties and responsibilities herein set forth and any written instructions or
other communications of any party hereto herein provided for; and, without
limiting the generality of the foregoing, the Escrow Agent shall have no
obligation or responsibility to determine the correctness of any statement or
calculation made by any party hereto in any written instruction or other
communication or the genuineness or validity of any document.  The Escrow Agent
shall be fully protected in acting in accordance with any joint written
instructions or other communications from Seller and Buyer given to it in
accordance with the provisions hereof and reasonably believed by it to have
been signed by the proper parties.  The Escrow Agent shall have no liability
for losses arising from any cause beyond its control, including (but not
limited to) the following: (i) the act, failure or neglect of any agent or
correspondent selected by the Escrow Agent for the remittance of funds; (ii)
any delay, error, omission or default of any mail, delivery, cable or wireless
agency or operator;





                            Exhibit C to Assignment
                                     Page 2
<PAGE>   48
(iii) the acts or edicts of any government or governmental agency or other
group or entity exercising governmental powers.  The Escrow Agent shall be
entitled to pay from the Escrow Funds the cost and expense of defending any
legal proceedings which may be instituted against it with respect to the
subject matter of this Escrow Agreement (including counsel and investigatory
fees); provided, however, the Escrow Agent shall consult with Seller and Buyer
prior to incurring any legal expenses.  The Escrow Agent shall not be required
to institute legal proceedings of any kind.

         5.      The Escrow Agent may resign at any time by giving written
notice to Seller and Buyer.  Such resignation shall not be effective until a
new Escrow Agent has been appointed by the joint written agreement of Seller
and Buyer.  The Escrow Agent may at any time be removed by joint notice in
writing delivered to the Escrow Agent by Seller and Buyer.  The Escrow Agent's
sole responsibility thereafter shall be to keep safely all Escrow Funds then
held by it and to deliver the same to a person designated by the Parties or in
accordance with the directions of a final order or judgment from a court having
competent jurisdiction.

         6.      For its services pursuant to this Escrow Agreement, the Escrow
Agent shall be entitled to a fee of _______________ DOLLARS ($______________.00
U.S.).  Any fees and expenses due the Escrow Agent shall be borne one-half
(1/2) by Seller and one-half (1/2) by Buyer and shall be paid within 10 days
after the receipt of an invoice from the Escrow Agent for such fees and
expenses.  The Parties jointly and severally agree to pay to the Escrow Agent
its fees for the services rendered by it pursuant to the provisions of this
Escrow Agreement and will reimburse the Escrow Agent for its reasonable
expenses, including reasonable attorney's fees incurred in connection with the
negotiations, drafting and performance by it of such services.  Except as
otherwise noted, this fee covers account acceptance, set-up and termination
expenses, plus usual and customary related administrative services such as
safekeeping, investment, collection and distribution of assets, including
normal record keeping and reporting requirements.  Any additional services
beyond the receipt, investment and payment of funds specified in this Escrow
Agreement, or activities requiring excessive administrator time or
out-of-pocket expenses such as optional substitution of collateral or
securities, shall be deemed extraordinary fees for which related costs,
transaction charges and additional fees will be billed at the Escrow Agent's
standard charges for such items.

         7.      The Parties agree to indemnify, defend and hold the Escrow
Agent harmless from and against any and all loss, damage, tax, liability and
expense that may be incurred by the Escrow Agent arising out of or in
connection with its acceptance or appointment as the Escrow Agent hereunder,
including the legal costs and expenses of defending itself against any claim or
liability in connection with its performance hereunder.

         8.      The Escrow Agent is hereby given a lien on the Escrow Funds
for all indebtedness that may become owing to the Escrow Agent hereunder, which
lien may be enforced by the Escrow Agent by setoff or appropriate foreclosure
proceedings provided that the Escrow Agent has given Buyer and Seller not less
than 10 days prior written notice thereof.





                            Exhibit C to Assignment
                                     Page 3
<PAGE>   49
         9.      The Parties warrant to the Escrow Agent that there are no
federal, state or local tax liabilities or filing requirements whatsoever
concerning the Escrow Agent's actions contemplated hereunder and warrant and
represent to the Escrow Agent that the Escrow Agent has no duty to withhold or
file any report regarding any tax liability under any federal or state income
tax, local or state property tax, local or state sales or use taxes, or any
other tax by any taxing authority.  The Parties agree to jointly and severally
indemnify the Escrow Agent fully for any tax liability, penalties or interest
incurred by the Escrow Agent arising hereunder and agree to pay in full any
such tax liability together with penalty and interest if any tax liability is
ultimately assessed against the Escrow Agent for any reason as a result of its
actions hereunder (except for the Escrow Agent's individual income tax
liability arising from its income from its fees).

         10.     All notices, requests, directions, instructions, waivers,
approvals or other communications to any party hereto shall be made or
delivered in person or by registered mail or certified mail, postage prepaid,
addressed to such party as provided below, or to such other address as such
party may hereafter specify in a written notice to the other parties named
herein, and all such notices or other communications shall be in writing so
addressed and shall be effective upon receipt by the addressee thereof:

         Escrow Agent:                         BANK
                          ---------------------
                          Corporate Trust Department

                          Attn:
                               --------------------------------

         Seller:          The Houston Exploration Company, Inc.
                          1331 Lamar, Suite 1065
                          Houston, Texas 77010
                          
                          Attn:  Thomas W. Powers
                          Telephone: (713) 652-2847
                          
         Buyer:           KeySpan Natural Fuel, LLC
                          One MetroTech Center
                          Brooklyn, New York 11201
                          
                          Attention: Zain Mirza
                          Telephone: (718) 403-2260
                          Fax: (718) 858-6431

         11.     No agreement shall be effective to amend or supplement this
Escrow Agreement unless such agreement is in writing and signed by the parties
hereto.  This Escrow Agreement may be executed in any number of execution
counterparts.

         12.     This Escrow Agreement shall be governed by and construed in
accordance with the laws of the State of ____________ except that statutory
provisions regarding fiduciary duties and





                            Exhibit C to Assignment
                                     Page 4
<PAGE>   50
liabilities of Trustees shall not apply to this Escrow Agreement.  The Parties
expressly waive such duties and liabilities, it being their intent to create
solely an agency relationship and hold the Escrow Agent liable only in the
event of its gross negligence or willful misconduct in order to obtain lower
fee schedule rates as specifically negotiated with the Escrow Agent.

         13.      This Escrow Agreement shall terminate by its own terms when
no funds remain in the Escrow Account, unless sooner terminated in writing by
the Parties, in which case the balance of any funds remaining in the Escrow
Account upon such termination shall promptly be paid in accordance with written
instructions signed by Seller and Buyer.

              [the remainder of this page is intentionally blank]





                            Exhibit C to Assignment
                                     Page 5
<PAGE>   51
         IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the date first above written.

                                     THE HOUSTON EXPLORATION COMPANY, INC.
                                    
                                    
                                     By:
                                        ------------------------------------
                                     Name:
                                     Title:
                                    
                                    
                                     KEYSPAN NATURAL FUEL, LLC
                                    
                                    
                                     By:
                                        ------------------------------------
                                     Name:
                                     Title:
                                    
                                                                    , BANK,
                                     -------------------------------
                                       as Escrow Agent
                                    
                                     By:
                                        ------------------------------------
                                     Name:
                                     Title:              President
                                           --------------




                            Exhibit C to Assignment
                                     Page 6
<PAGE>   52
                                   EXHIBIT D

                                    FORM OF

                    OPTION TO PURCHASE OIL AND GAS INTERESTS


         This Option to Purchase Oil and Gas Interests (this "Option") is
granted this 1st day of  January, 1997 by KEYSPAN NATURAL FUEL, LLC, a Delaware
limited liability company, whose address is One Metrotech Center, Brooklyn, New
York 11201 ("Grantor") to THE HOUSTON EXPLORATION COMPANY, INC., a Delaware
corporation, whose address is 1331 Lamar, Suite 1065, Houston, Texas 77010
("Grantee").

         For $10.00 and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Grantor grants and conveys to
Grantee the exclusive and irrevocable option to purchase all of the following
(the "Subject Interests") upon the terms and conditions set forth herein (the
"Option"):

                 A.       All of Grantor's right, title and interest in and to
         the oil and gas leases described in Exhibit A, including any royalty,
         overriding royalty and other interests owned by Seller in such lease,
         but insofar and only insofar as said leases and other interests cover
         (i) the lands described in Exhibit A and (ii) the zone, horizon or
         interval described in Exhibit B for each of the wells described in
         Exhibit B (the above described interest in such leases being herein
         called the "Leases" and the above described wells being herein called
         the "Wells");

                 B.       All right, title and interest of Grantor in and to,
         or derived from, all valid oil, gas and mineral unitization, pooling,
         operating and communitization agreements, declarations and orders
         affecting the Leases and Wells, and in and to the properties covered
         and the units created thereby (the "Unitization and Pooling
         Agreements");

                 C.       All right, title and interest of Grantor in and to
         the personal property and fixtures that are appurtenant to the Leases,
         or the Wells, or the Units, including all wells, casing, tubing,
         pumps, separators, tanks, lines and other personal property and oil
         field equipment on such Leases (the "Personal Property");  and

                 D.       All right, title and interest of Grantor in and to
         and under, or derived from, all valid gas sales, purchase, gathering
         and processing contracts and operating agreements, joint venture
         agreements, partnership agreements, rights of way, easements, permits
         and surface leases and other contracts, agreements and instruments,
         only in relevant part to the extent and insofar as the same are
         appurtenant to the Leases, Wells and Units (the "Agreements").

         1.      Exercise of the Option.  If the Management Agreement between
Grantor and    Grantee dated January 1, 1997 has not been terminated pursuant
to Section 7.1(b) thereof, Grantee has the right to exercise the Option any
time during the period from January 1, 1997 until the later





                                      D-1
<PAGE>   53
of (i) April 1, 2003  or (ii) 30 days after notice in writing from Grantor
stating that the Option will terminate if not exercised as to all Subject
Interests then subject thereto (the "Option Period") to purchase the Subject
Interests as an entirety for the purchase price determined in accordance with
Section 4 below.

         2.      Method of Exercise.  To exercise the Option within the Option
Period as to any Subject Interests, the Grantee must deliver notice (an
"Exercise Notice") of such exercise in writing, delivered personally, by
prepaid telecopy or similar means (with signed confirmed copy to follow by mail
in the manner provided below) or by registered or certified mail, postage
prepaid, or by delivery service for which a receipt is obtained, at the address
set forth in the first paragraph of this Option, and shall be deemed delivered
on the date of receipt.  The Exercise Notice shall specify the portion of the
Subject Interests which Grantee desires to repurchase pursuant to such exercise
of the Option.  Each party may specify an alternative address by giving written
notice to the other of such change.

         3.      Option Effective Date.  The effective date of the purchase of
the Subject Interests pursuant to an Exercise Notice (the "Option Effective
Date") shall be the first day of the month following the date Grantor receives
the Notice.

         4.      Option Price.  The purchase price for the purchase of the
Subject Interests shall be the appraised fair market value of the Subject
Interests specified in the Exercise Notice as of the Option Effective Date net
of the fair market value  of the reserves attributable to the Production
Payment and the Reversionary Interest.  Unless the Grantor and Grantee agree
otherwise, the appraised fair market value of the Subject Interests shall be
the present value as of the Option Effective Date of the future net revenue and
costs (based on the average of such costs during the preceding twelve months)
estimated to be received therefrom (net of the revenues and costs attributable
to the Production Payment and Reversionary Interest), determined in accordance
with generally accepted engineering principles in effect at the time, by Miller
& Lenz, Ltd. or another nationally recognized petroleum engineering company
agreed upon by Grantor and Grantee.  The price of hydrocarbons produced from
each Subject Interest and utilized in the forecast shall be based on an
unescalated average gas price reflective of the most recent 12-month period, as
quoted in the first monthly publication of Inside FERC's Gas Market Report for
Index for the first index pricing point downstream of such Subject Interest
adjusted for transportation costs from the Subject Interest to the index
pricing point (or a mutually agreeable substitute index if such index is no
longer published).  The discount rate to be applied shall be the prime rate in
effect at Chase Manhattan Bank (or if such bank no longer exists, the United
States prime rate generally recognized in the financial media from
time-to-time) on the date on which the fair market value determination is made
plus 1.75 percent.

         5.      Terms of Purchase.  Upon the closing of the purchase of the
Subject Interests pursuant to an exercise of the Option, Grantee shall be
entitled to receive, subject to the Production Payment, the proceeds, accounts
receivable, income, revenues, monies and other items attributable to the
Subject Interests from and after the Option Effective Date and same shall be
paid over to Grantee, and Grantee shall be liable to pay the expenses
attributable to the Subject Interests from and after the Option Effective Date.
Subject to the terms of the Assignment, Grantor shall be entitled to





                                      D-2
<PAGE>   54
receive the production from the Subject Interests prior to the Option Effective
Date and shall be liable to pay the expenses attributable to the Subject
Interests prior to the Option Effective Date.  Upon the closing of the purchase
of the Subject Interests pursuant to an exercise of the Option, Grantee shall
assume all obligations and liabilities attributable to the ownership or
operation of the Subject Interests  on and after the Option Effective Date,
including the contractual and regulatory obligations in connection with the
Subject Interests  and Grantee shall defend, indemnify and hold harmless the
Grantor (and its successors, assigns, members, officers, managers, employees,
representatives, agents and consultants) from and against all claims, demands,
actions, obligations, liabilities and expenses (including reasonable attorney,
consultant and expert witness fees) arising from such obligations and
liabilities assumed by Grantee hereunder.

         6.      Payment and Closing.  The closing of the purchase pursuant to
an exercise of the Option shall occur at the offices of Grantee at 9:00 a.m. on
a mutually agreed upon business day no later than 90 days from the date the
Grantor receives the notice of an exercise.  At the closing, the Grantee shall
deliver by wire transfer of immediately available U.S. funds, to the account
designated by Grantor, the purchase price for the Subject Interests, and the
Grantor shall deliver to Grantee one or more assignments fully executed and in
recordable form of the Subject Interests dated effective as of the Option
Effective Date  and in form and substance reasonably satisfactory to Grantee
with warranty of title as to all matters arising by, through or under Grantor,
but not otherwise.

         7.      Governing Law.  Except to the extent the terms hereof are
governed mandatorily by the real property laws of the states in which the
Subject Interests are located, the validity, effect and construction of this
Assignment shall be governed by the laws of the State of New York.

         8.      Further Assurances.  Grantor and Grantee agree to execute and
deliver to the other all such other and additional instruments, notices,
division orders, transfer orders and other documents and to do all such other
and further acts and things as may be necessary to more fully and effectively
grant, convey and assign to Grantee the rights, titles, interest and estates
conveyed to Grantee pursuant to any exercise of the Option or otherwise
reasonably requested in connection therewith.

         9.      Counterparts.  This Option may be executed in multiple
originals, all of which are identical except that, for the convenience of
recording, counterparts hereof which are being recorded in the various counties
where the Leases and Wells are located include only those certain portions of
Exhibits A and B which include descriptions of properties located in the
recording jurisdiction in which the particular counterpart is being recorded.
All of such counterparts together shall constitute one and the same instrument.





                                      D-3
<PAGE>   55

         IN WITNESS WHEREOF, the parties have executed this Assignment on this
2nd day of July, 1997.

                                       GRANTOR:                               
                                                                              
                                       KEYSPAN NATURAL FUEL, LLC  
                                                                              
                                       By:  /s/ ZAIN MIRZA
                                          ------------------------------------
                                                Zain Mirza
                                                Chief Financial Officer  
                                       
                                                                              
                                       GRANTEE:                               
                                                                              
                                       THE HOUSTON EXPLORATION COMPANY, INC. 
                                                                              
                                                                              
                                       By:  /s/ THOMAS W. POWERS
                                          ------------------------------------
                                                Thomas W. Powers
                                                Senior Vice President         




RETURN RECORDED INSTRUMENT TO:

Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas  77002-6760
Attention:  Yvonne Onak





                                      D-4
<PAGE>   56
STATE OF NEW YORK         )
                          )        ss.
COUNTY OF  KINGS          )

         The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Zain Mirza as Chief Financial Officer for KEYSPAN NATURAL FUEL,
LLC, a Delaware limited liability company, on behalf of the company.


         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------


(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999


STATE OF NEW YORK         )
                          )        ss.
COUNTY OF KINGS           )

         The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for THE HOUSTON
EXPLORATION COMPANY, INC., a Delaware corporation, on behalf of the
corporation.

         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------

(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999



                                      D-5
<PAGE>   57
                                   EXHIBIT E

                                    FORM OF

                              MANAGEMENT AGREEMENT


         This Management Agreement (the "Agreement"), dated as of January 1,
1997, is by and between KEYSPAN NATURAL FUEL, LLC, a Delaware limited liability
company (the "Company") and THE HOUSTON EXPLORATION COMPANY, INC., a Delaware
corporation ("Manager") (collectively, the "Parties").

                                    RECITALS

         A.      The Company owns a working interest and/or a royalty interest
in certain Wells that comprise the Assets;

         B.      Manager has the resources and expertise necessary to operate
and manage the Assets and to provide the management services to the Company as
set forth in this Agreement (collectively the "Services" as defined in Article
2 below);

         C.      The Company desires to retain Manager to provide such Services
and Manager desires to provide such Services all pursuant to the terms of this
Agreement; and

         D.      The Company recognizes that Manager owns and operates other
properties and that Manager will be operating such properties in the best
interest of the owners of those properties.  Notwithstanding the foregoing, the
Parties intend that Manager be held to the standard of performance set forth
herein and in the operating agreements covering the Assets.

                                   AGREEMENT

         In consideration for the mutual promises hereunder, the Parties agree
as follows:

                                   ARTICLE 1

                                  DEFINITIONS

         All capitalized terms used herein without definition shall have the
meanings ascribed thereto in the Assignment of Oil and Gas Leases with
Reservation of Production Payment dated effective January 1, 1997  (the
"Assignment"), by and between the Company and Manager ("Seller"), or in the
case of the terms "Assets," "Environmental Laws," "Losses," "Post-Effective
Date Liabilities" and "Wells," in the Purchase and Sale Agreement dated January
1, 1997, by and between the Company and Seller (the "Purchase and Sale
Agreement").





                                      E-1
<PAGE>   58
                                   ARTICLE 2

                                    SERVICES

         2.1     Subject to Section 2.2 hereof, the constraints of applicable
operating and other agreements to which all or any portion of the Assets are
now or hereafter subject and the other terms of this Agreement, Manager agrees
to manage the Assets for and on behalf of the Company, such management to
include, without limitation, performance of the following management functions
(the "Services") all of which are hereby expressly authorized by the Company:

                 (a)      Operate, manage, and maintain the Assets.

                 (b)      Gather, process condition, market, deliver, transport
and sell gas, oil and related hydrocarbons produced by the Company from the
Assets, and pay or cause to be paid all royalties and production payments
(including, without limitation, the Production Payment), and all other such
payment obligations arising in connection with the Assets or the production of
hydrocarbons therefrom; provided, however, that Manager shall obtain the
approval of the Company to enter into any sales or marketing agreement which
has a term of one year or greater.

                 (c)      Operate the Assets in compliance in all material
respects with all federal, state (including any duly constituted federal or
state regulatory body), and local laws, ordinances, rules, regulations and
orders applicable to the Assets.

                 (d)      Operate the Assets in compliance in all material
respects with all Environmental Laws and to implement and complete, or cause to
be implemented and completed, any remedial, removal or other response action
required on the Assets under applicable Environmental Laws, with such actions
to be implemented and completed in accordance with customary industry practices
and in compliance with applicable Environmental Laws.

                 (e)      Inform the Company of any pending or threatened
action or investigation of which the Manager receives written notice and which
Manager believes in good faith could have a material adverse impact on the
Assets, including all actions initiated or investigations threatened by a third
party or governmental authority under applicable Environmental Laws.

                 (f)      Manage and dispose of all solid and/or hazardous
wastes generated in connection with the operation of the Assets in compliance
in all material respects with applicable Environmental Laws and to initiate and
complete any remedial, removal or other response actions required under
applicable Environmental Laws in response to any release of a hazardous
substance on or in connection with the Assets.

                 (g)      Employ or contract for the services of any Person
required by Manager, in its reasonable discretion, to assist Manager in the
performance of any of its duties and responsibilities under this Agreement,
including, without limitation, any legal, accounting, geological, geophysical,
engineering, operating and other services and advice as the Manager deems
advisable, in its reasonable discretion, from any Person.





                                      E-2
<PAGE>   59
                 (h)      Pay and perform all obligations of the Company which
relate to the Assets, including, without limitation, the payment to itself, on
behalf of the Company, of all money to which it becomes entitled pursuant to
the Assignment and the Agreement, and payment to third parties, on behalf of
the Company, of working interest expenses attributable to the Assets.

                 (i)      Maintain insurance with respect to the Assets as is
reasonable and customary in the industry, including insurance of the types and
amounts set forth in the certificate furnished to Buyer pursuant to Section 9.2
of the Purchase Agreement and with respect to all such insurance, cause the
Company to be named as an additional insured on all such insurance policies.

                 (j)      Execute and file and record, when appropriate or
required, all assignments and other regulatory instruments relating to the
Assets.

                 (k)      Establish and maintain all bank accounts, books and
records, capital accounts, Net Profits Account and other accounts as are
required or convenient to operate the Assets.

                 (1)      Perform all accounting and reporting as required by
the Assignment, the Purchase and Sale Agreement, and any other agreement
relating to the Assets and to which the Company is subject.

All accounting and reporting shall be performed in accordance with the
provisions of this Agreement, consistently applied.  Such accounting and
reporting may initially be performed based on estimated figures, and
subsequently based on actual figures.  Beginning with the Payment Period
commencing on January 1, 1997, and every applicable Payment Period thereafter,
Manager shall prepare and furnish to the Company within 30 days after the end
of such Payment Period a Quarterly  Report.  "Quarterly Report" shall mean a
report detailing gas production and sales from the Assets attributable to the
Wells for the applicable Payment Period.  Such Quarterly Report shall include
(1) an accounting of the Net Profits Account, including a summary of all
credits and debits, (2) an accounting of the Company's share of all tax credit
qualified gas sales and production and total gas sales and production
attributable to the Assets and produced from the Wells, and (3) all other
information necessary and sufficient for the Company to calculate and verify
any Credit Payment Amount and to estimate its taxable income with respect to
the Assets.

         On or before December 15th of each year, Manager shall furnish to the
Company a report covering the fiscal year ended September 30 (referred to
herein as the "Annual Report"), based upon mutually agreeable procedures, of
(1) the Net Profits Account, including all credits and debits, (2) the
Company's share of all tax credit qualified gas sales and production and total
gas sales and production attributable to the Assets and produced from the
Wells, (3) credits under Section 29 of the Internal Revenue Code of 1986, as
amended, ("IRC") which are attributable to the Assets, and (4) all other
information necessary and sufficient for the Company to calculate and report
its taxable income with respect to the Assets for the fiscal year ended on
September 30.  If the production figures reported by Manager are amended by
Manager or any other operator or producer subsequent to Manager furnishing an
Annual Report to the Company, an amended Annual Report for the affected time
period shall be furnished to the Company within 60 days after the end of a
calendar quarter during which Manager received the amended production figures.
Notwithstanding the





                                      E-3
<PAGE>   60
immediately foregoing, Manager shall have no obligation to amend a prior Annual
Report if the applicable period of limitations for the Internal Revenue Service
to make assessments with respect to the year in question has expired.

                 (m)      Manage all contracts relating to the Assets to which
the Company is or becomes a party (except for the Purchase and Sale Agreement).

                 (n)      Receive and collect all revenues and income
attributable to the Assets, including, without limitation, all Gross Proceeds
and Other Income.

                 (o)      Negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets which the Manager believes are necessary or desirable in connection with
the ownership, development, operation, production and maintenance of the Assets
or to perform any of the Services hereunder; provided, however, that Manager
shall obtain the approval of the Company to enter into any contract or
agreement which will have a cost to the Company exceeding $15,000.

                 (p)      Assume the defense of, handle, investigate and/or
settle all claims, demands, causes of action, lawsuits and other proceedings
which relate in any way to the Assets or the Services performed pursuant to
this Agreement; provided, however, that Manager shall obtain the approval of
the Company to enter into a settlement of any claim or action which will have a
cost to the Company exceeding $10,000.

                 (q)      All other acts and things as are necessary to carry
out the Manager's responsibilities under this Agreement.

                 Notwithstanding anything herein provided to the contrary, if
the Manager is not at any time the operator of a particular portion of the
Assets, the obligations of the Manager under this Agreement with respect to
such portion of the Assets, which have reference to operations or activities
which pursuant to contracts which are now or hereafter in effect are carried
out or performed by the operator, shall be construed to require only that the
Manager use reasonable efforts to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints
of the applicable contracts.

         2.2     The Parties anticipate that the Gross Proceeds and Other
Income from the Assets will be sufficient to pay for all of the Services
hereunder and Manager is expressly authorized to use the Gross Proceeds and
Other Income from the Assets for such purpose.  Unless Manager obtains the
prior written approval of the Company and except for emergency situations,
Manager will not undertake or approve Services or operations on the Assets that
in any instance will be anticipated to involve costs and expenses exceeding
Gross Proceeds and Other Income for such period when such costs and expenses
are payable and which excess costs and expenses cannot reasonably be expected
to be recouped from the Gross Proceeds and Other Income from a subsequent
period or periods.  Unless Manager obtains the prior written approval of the
Company, Manager shall not undertake or approve Services or operations on the
Assets which will exceed cost levels or estimates previously approved by the
Company.  If Manager reasonably anticipates the costs and expenses to





                                      E-4
<PAGE>   61
be incurred during a particular period in order to perform the Services
hereunder for such period will (a) exceed Gross Proceeds and Other Income for
that same period, but that the excess costs and expenses over Gross Proceeds
and Other Income reasonably will be expected to be recouped from the Gross
Proceeds and Other Income from a subsequent period or periods, or (b) exceed
cost levels or estimates previously approved by the Company, then Manager shall
forward to the Company a request for the amount of funds required for the
Manager to timely perform such Services, together with documentation supporting
Manager's request.  The Company shall respond to Manager's request on or before
10 business days after receipt of such request.  If the Company in its
reasonable discretion elects to grant Manager's request, the Manager will
undertake such Service or operations on the Assets and the Company shall pay to
Manager the funds required for the Manager to timely perform such Services,
with the Company to recoup all such funds out of the revenues and income
collected by the Manager pursuant to Section 2.1(n) above on a schedule to be
determined by the Parties.  Notwithstanding the foregoing, the Company shall
have no obligation to pay any costs or expenses from any source other than from
Gross Proceeds, Other Income and the amounts paid by the Company pursuant to
Section 2.3(a).

         2.3     (a)      The Manager shall invoice the Company for costs and
expenses incurred during each Payment Period in an amount not to exceed the
Credit Payment Amount for such Payment Period.  Such invoice shall be delivered
not later than 45 days following the end of such Payment Period.  The Company
shall pay the amount due pursuant to each invoice not later than 75 days
following the end of the applicable Payment Period.

                 (b)      The amounts paid to Manager pursuant to Section
2.3(a) together with the  revenues collected by the Manager pursuant to Section
2.1(n) above shall be used by the Manager to pay for the Services hereunder
including the payment of and to pay the Production Payment under the Assignment
and the payment of the Management Fee under this Agreement.

                 (c)      Any Person is entitled to rely on this Agreement as
granting to the Manager the power and authority to manage the Assets and to
perform each of the Services on behalf of the Company.  Although the Company
acknowledges that no further action or documentation is required to be given by
the Company in order to authorize or empower the Manager to manage the Assets
and to perform any of the Services on behalf of the Company, the Company agrees
to promptly furnish to the Manager whatever documentation or to promptly take
whatever action is requested by Manager to evidence that the Manager has the
power and authority to manage the Assets and to perform the Services on behalf
of the Company.

                                   ARTICLE 3

                            PERFORMANCE OF SERVICES

         Manager agrees to use reasonable efforts to perform all of the
Services in a reasonable and prudent manner consistent with good oil field and
business practices and taking into account the tax credits available with
respect to production from the Subject Interests. Notwithstanding any other
provision of the Agreement, it is expressly agreed that the Services rendered
by manager shall be as an independent contractor and the Company shall have no
supervision or control over the manner





                                      E-5
<PAGE>   62
or method used by Manager in performing the tasks and duties set forth herein.
The Company's sole interest shall be in the results obtained.

                                   ARTICLE 4

                                 MANAGEMENT FEE

         The Company shall pay Manager a fee of $8,333 per month during the
term of this Agreement (the "Management Fee").  The Management Fee is intended
to reimburse Manager for all of its internal administrative expenses incurred
in managing the Assets.  The Parties understand that the Management Fee does
not cover COPAS overhead charges payable to any Person (including Manager) with
respect to the Assets under any applicable operating or other agreement, and
Manager shall pay such overhead charges pursuant to Section 2.1(h) as part of
the Company's obligations relating to the Assets.  In addition, with respect to
any Well which is not covered by an operating agreement, Manager shall be
entitled to charge the Company and to pay to itself out of the revenue and
income collected by it pursuant to Section 2.1(n) or 2.2(a)  above, a monthly
overhead charge of $125 per well; provided, however that such well rates shall
be adjusted in the manner provided for in Paragraph l(A)(3) of Section III of
the 1984-Onshore COPAS Accounting Procedure.

                                   ARTICLE 5

                                INDEMNIFICATION

         5.1     Manager shall defend, indemnify and hold harmless the Company,
and its officers, directors, employees, and agents, from and against all Losses
which arise directly or indirectly from or in connection with Manager's
management of the Assets and performance of the Services during the term of
this Agreement (including any breach of its duties and obligations under this
Agreement).  THIS INDEMNITY SHALL INCLUDE ANY LOSSES ARISING OUT OF THE SOLE,
JOINT, CONCURRENT OR SUCCESSIVE NEGLIGENT (BUT NOT GROSS NEGLIGENCE) OF ANY
INDEMNIFIED PARTY.

         5.2     Manager shall defend, indemnify and hold harmless the Company,
and its officers, directors, employees, and agents, from and against all Losses
which arise directly or indirectly from or in connection with environmental
matters, including without limitation, any violation of any Environmental Law
and any remedial, removal or other expense obligation under any Environmental
Law,  to the extent that Manager, or its successors or assigns, is jointly
liable with the Company and such environmental matters are attributable to the
period of time during which this Agreement is in force and effect.  THIS
INDEMNITY SHALL INCLUDE ANY LOSSES ARISING OUT OF THE SOLE, JOINT, CONCURRENT
OR SUCCESSIVE NEGLIGENT (BUT NOT GROSS NEGLIGENCE) OF ANY INDEMNIFIED PARTY.

                                   ARTICLE 6

                                   ASSIGNMENT

         The rights and obligations of the Company under this Agreement may not
be assigned or delegated by the Company, except to an Affiliate of the Company,
unless the Manager has consented to such assignment in writing, which consent
shall not be unreasonably withheld, delayed or





                                      E-6
<PAGE>   63
conditioned.  The rights, duties and obligations of Manager under this
Agreement may not be assigned or delegated by Manager in whole or in part
unless the Company has consented thereto in writing which consent shall not be
unreasonably withheld, delayed or conditioned.  Nothing contained in this
Article 6 shall prevent Manager from engaging qualified contractors,
subcontractors, vendors and suppliers in  the ordinary course of operating and
managing the Subject Interests, but no such engagement shall relieve Manager of
any of its duties or obligations hereunder.

                                   ARTICLE 7

                               TERM/TERMINATION

         7.1     The term of this Agreement shall commence on the Effective
Date hereof and shall continue until the date on which the earliest of the
following occurs:

                 (a)      January 1, 2014  , and thereafter, this Agreement
         shall continue on a year-to-year basis until terminated by either
         party upon 90 days written notice to the other party.

                 (b)      delivery of written notice of termination by the
         Company to Manager following the occurrence of any of the following:

                          (i)     at any time if Manager breaches any material
                 provision of this Agreement and Manager fails or refuses to
                 cure them and within 30 days after written notice from the
                 Company identifying such failure and stating that the failure
                 to cure the same may result in the termination of this
                 Agreement and the Option (or, if such cure reasonably requires
                 more than 30 days to complete, Manager has not promptly
                 commenced actions for such cure, and prosecuted such actions
                 with diligence after receipt of such notice);

                          (ii)    at any time if Manager has been guilty of
                 gross negligence or willful misconduct in carrying out its
                 duties hereunder;

                          (iii)   at any time if there is instituted by or
                 against Manager any proceedings under the Bankruptcy Reform
                 Act of 1978, as amended, under any other bankruptcy law, or
                 under any other law for the relief of debtors now or hereafter
                 existing, or a receiver is appointed for all or substantially
                 all of the assets of Manager, and such proceeding is not
                 dismissed or such receiver is not discharged, as the case may
                 be, within 30 days thereafter; or

                          (iv)    at any time if manager shall (A) become
                 insolvent, (B) generally fail to or admit in writing its
                 inability to, pay debts as they become due, and (C) make a
                 general assignment for the benefit of creditors, (D) apply
                 for, consent to or acquiesce in the appointment of a trustee,
                 receiver, or other custodian.
    
                 (c)     upon exercise of the Option, this Agreement shall 
         terminate; and


                 (d)     at any time on 90 days written notice by the Company 
         to the Manager.





                                      E-7
<PAGE>   64
Any termination of this Agreement, shall be without prejudice to the right of
the party not in default to collect any amounts then due and without waiver of
any other remedy to which the party not in default may be entitled for breach
of this Agreement.  Upon termination of this Agreement (other than pursuant to
clause (c) above), Manager shall deliver to the Company or its designated
agent, copies of all title files, division order files, well files, production
records, equipment inventories, and production, severance and ad valorem tax
records pertaining to the Wells and other information about the Assets
reasonably requested by the Company.

                                   ARTICLE 8

                                 MISCELLANEOUS

         8.1     This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the Parties
hereto and delivered to the other Party.

         8.2     This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.

         8.3     All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally, sent by documented
overnight delivery service or, to the extent receipt is confirmed, by United
States mail, telecopy, telefax or other electronic transmission service to the
appropriate address as set forth below.
         
                 If to Manager:            The Houston Exploration Company
                                           1331 Lamar, Suite 1065
                                           Houston, Texas 77010
                                           Attn:  Thomas W. Powers
                                           Telephone:  (713) 652-2847
                                           Fax:  (713) 652-4017

                 If to Company:            KeySpan Natural Fuel, LLC
                                           One Metrotech Center
                                           Brooklyn, New York 11201
                                           Attention:  Zain Mirza
                                           Telephone:  (718) 403-2260
                                           Fax:  (718) 858-6431

or at such other address and to the attention of such other person as such
Party may designate by written notice to the other Party.

         8.4     The Company shall be deemed to have given its approval to
Manager for any matter requiring the Company's approval if the Company fails to
affirmatively give or deny its approval to Manager within 7 days of receipt
from Manager of a request for approval under this Agreement.





                                      E-8
<PAGE>   65
         8.5     Subject to Article 6 hereof, this Agreement shall be binding
upon and inure to the benefit of the Parties and their respective successors
and permitted assigns.

         8.6     This Agreement may not be modified or amended except by an
instrument or instruments in writing signed by the Parties.  Any party hereto
may, only by an instrument in writing, waive compliance by another Party with
any term or provision of this Agreement on the part of such other Party to be
performed or complied with.  The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any
subsequent breach.

         8.7     If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any adverse manner to any
party.  Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated - hereby are fulfilled to the extent possible.

         8.8     This Agreement is not intended to create, and shall not be
construed to create, a relationship of partnership or an association for profit
between the Manager and the Company.

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

                                        KEYSPAN NATURAL FUEL, LLC

                                        By: /s/ ZAIN MIRZA
                                           ---------------------------------
                                                Zain Mirza
                                                Chief Financial Officer


                                        THE HOUSTON EXPLORATION COMPANY, INC.

                                        By: /s/ THOMAS W. POWERS
                                           ---------------------------------
                                                Thomas W. Powers
                                                Senior Vice President



                                      E-9
<PAGE>   66
                       MEMORANDUM OF MANAGEMENT AGREEMENT


         This MEMORANDUM OF MANAGEMENT AGREEMENT is effective as of  January 1,
1997, and is executed by and between KEYSPAN NATURAL FUEL, LLC, a Delaware
limited liability company (the "Company") and THE HOUSTON EXPLORATION COMPANY,
INC., a Delaware corporation ("Manager") (collectively, the "Parties").

         The Parties hereby give notice that they have entered into a
Management Agreement dated as of the date hereof, whereby the Company
contracted with Manager to perform certain operating and management services
relative to the lands and leases identified on Exhibit A and to the wells
identified on Exhibit B (collectively, the "Assets").

         Manager has agreed to manage the Assets for and on behalf of the
Company, by performing certain management services (the "Services"), as limited
and described in more detail in the Management Agreement, which Services
include but are not limited to the following:

                 (a)      Operate, manage, and maintain the Assets.

                 (b)      Gather, process condition, market, deliver, transport
and sell gas, oil and related hydrocarbons produced by the Company from the
Assets, and pay or cause to be paid all royalties and production payments
(including, without limitation, the Production Payment), and all other such
payment obligations arising in connection with the Assets or the production of
hydrocarbons therefrom; provided, however, that Manager shall obtain the
approval of the Company to enter into any sales or marketing agreement which
has a term of one year or greater.

                 (c)      Operate the Assets in compliance in all material
respects with all federal, state (including any duly constituted federal or
state regulatory body), and local laws, ordinances, rules, regulations and
orders applicable to the Assets.

                 (d)      Operate the Assets in compliance in all material
respects with all Environmental Laws and to implement and complete, or cause to
be implemented and completed, any remedial, removal or other response action
required on the Assets under applicable Environmental Laws, with such actions
to be implemented and completed in accordance with customary industry practices
and in compliance with applicable Environmental Laws.

                 (e)      Inform the Company of any pending or threatened
action or investigation of which the Manager receives written notice and which
Manager believes in good faith could have a material adverse impact on the
Assets, including all actions initiated or investigations threatened by a third
party or governmental authority under applicable Environmental Laws.

                 (f)      Manage and dispose of all solid and/or hazardous
wastes generated in connection with the operation of the Assets in compliance
in all material respects with applicable Environmental Laws and to initiate and
complete any remedial, removal or other response actions required under
applicable Environmental Laws in response to any release of a hazardous
substance on or in connection with the Assets.





                                      E-10
<PAGE>   67
                 (g)      Employ or contract for the services of any Person
required by Manager, in its reasonable discretion, to assist Manager in the
performance of any of its duties and responsibilities under this Agreement,
including, without limitation, any legal, accounting, geological, geophysical,
engineering, operating and other services and advice as the Manager deems
advisable, in its reasonable discretion, from any Person.

                 (h)      Pay and perform all obligations of the Company which
relate to the Assets, including, without limitation, the payment to itself, on
behalf of the Company, of all money to which it becomes entitled pursuant to
the Assignment, and payment to third parties, on behalf of the Company, of
working interest expenses attributable to the Assets.

                 (i)      Maintain insurance with respect to the Assets as is
reasonable and customary in the industry, including insurance of the types and
amounts set forth in the certificate furnished to Buyer pursuant to Section 9.2
of the Purchase Agreement and with respect to all such insurance, cause the
Company to be named as an additional insured on all such insurance policies.

                 (j)      Execute and file and record, when appropriate or
required, all assignments and other regulatory instruments relating to the
Assets.

                 (k)      Establish and maintain all bank accounts, books and
records, capital accounts, Net Profits Account and other accounts as are
required or convenient to operate the Assets.

                 (1)      Perform all accounting and reporting as required by
the Assignment, the Purchase and Sale Agreement, and any other agreement
relating to the Assets and to which the Company is subject.

                 (m)      Manage all contracts relating to the Assets to which
the Company is or becomes a party (except for the Purchase and Sale Agreement).

                 (n)      Receive and collect all revenues and income
attributable to the Assets, including, without limitation, all Gross Proceeds
and Other Income.

                 (o)      Negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets which the Manager believes are necessary or desirable in connection with
the ownership, development, operation, production and maintenance of the Assets
or to perform any of the Services hereunder; provided, however, that Manager
shall obtain the approval of the Company to enter into any contract or
agreement which will have a cost to the Company exceeding $15,000.

                 (p)      Assume the defense of, handle, investigate and/or
settle all claims, demands, causes of action, lawsuits and other proceedings
which relate in any way to the Assets or the Services performed pursuant to
this Agreement; provided, however, that Manager shall obtain the approval of
the Company to enter into a settlement of any claim or action which will have a
cost to the Company exceeding $10,000.





                                      E-11
<PAGE>   68
                 (q)      All other acts and things as are necessary to carry
out the Manager's responsibilities under this Agreement.

         Notwithstanding anything herein provided to the contrary, if the
Manager is not at any time the operator of a particular portion of the Assets,
the obligations of the Manager under the Management Agreement with respect to
such portion of the Assets, which have reference to operations or activities
which pursuant to contracts which are now or hereafter in effect are carried
out or performed by the operator, shall be construed to require only that the
Manager use reasonable efforts to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints
of the applicable contracts.

         The Management Agreement is effective for the period from January 1,
1997 until terminated in accordance with its terms.

         This Memorandum of Management Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.

         IN WITNESS WHEREOF, the Parties have executed this Memorandum of
Management Agreement as of the date first above written.


                                        KEYSPAN NATURAL FUEL, LLC

                                        By: /s/ ZAIN MIRZA
                                           ---------------------------------
                                                Zain Mirza
                                                Chief Financial Officer


                                        THE HOUSTON EXPLORATION COMPANY, INC.

                                        By: /s/ THOMAS W. POWERS
                                           ---------------------------------
                                                Thomas W. Powers
                                                Senior Vice President






                                      E-12
<PAGE>   69

STATE OF NEW YORK         )
                          )        ss.
COUNTY OF  KINGS          )

         The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Zain Mirza as Chief Financial Officer for KEYSPAN NATURAL FUEL,
LLC, a Delaware limited liability company, on behalf of the company.


         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------


(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999


STATE OF NEW YORK         )
                          )        ss.
COUNTY OF KINGS           )

         The foregoing instrument was acknowledged before me this 2 day of
July, 1997 by Thomas W. Powers as Senior Vice President for THE HOUSTON
EXPLORATION COMPANY, INC., a Delaware corporation, on behalf of the
corporation.

         Witness my hand and official seal.

                                             /s/  CHARLES KLEIN       
                                             -----------------------------------
                                             Notary Public            
                                                                      
                                             My commission expires:    2/28/99
                                                                   -------------

(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999

RETURN RECORDED INSTRUMENT TO:

Vinson & Elkins
1001 Fannin Street, Suite 2300
Houston, Texas  77002-6760
Attention:  Yvonne Onak


                                      E-13
<PAGE>   70
                                   EXHIBIT F

                  FORM OF CERTIFICATE OF NON-FOREIGN OWNERSHIP

         Section 1445 of the Internal Revenue Code provides that a buyer of a
United States real property interest must withhold tax if the seller is a
foreign person.  To inform KeySpan Natural Fuel, LLC  (the "Buyer") that
withholding of tax is not required upon the disposition of a United States real
property interest owned by The Houston Exploration Company, Inc. (the
"Seller"), the undersigned hereby certifies the following on behalf of Seller:

                 1.       The Seller is not a non-resident alien, foreign
                          corporation, foreign partnership, foreign trust, or
                          foreign estate (as those terms are defined in the
                          Internal Revenue Code and Income Tax Regulations);

                 2.       The United States employer/taxpayer identification
                          number of the Seller is  22-2674487; and

                 3.       Seller's address is:
                                  The Houston Exploration Company
                                  1331 Lamar, Suite 1065
                                  Houston, Texas  77010

Seller understands that this certification may be disclosed to the Internal
Revenue Service by the Buyer and any false statement contained herein may be
punished by fine, imprisonment, or both.

         Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete, and I further declare that I have authority to sign this document
on behalf of Seller.

                                        By: /s/  THOMAS W. POWERS
                                           --------------------------------
                                                 Thomas W. Powers
                                                 Senior Vice President      

         Subscribed and sworn before me this 2 day of July, 1997.

                                         /s/  CHARLES KLEIN
                                        -----------------------------------
                                        Notary Public 
                                        Name:
                                             ------------------------------
                                        Address:
                                                ---------------------------

                                        My commission expires:  2/28/99
                                                              -------------

(SEAL)                                                 Charles Klein
                                             Notary Public, State of New York
                                                     No. 24-01KL4766052
                                                 Qualified in Kings County
                                             Commission Expires Feb. 28, 1999

                                      F-1
<PAGE>   71
                                   EXHIBIT G
                                       TO
                          PURCHASE AND SALE AGREEMENT


                                 RESERVE REPORT



[EXHIBIT G HAS BEEN OMITTED AS IT CONTAINS A DETAILED RESERVE REPORT OF ALL
WELLS PURCHASED AND SOLD]