Document:

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                                                                    EXHIBIT 10.1

                         RESTATED EXPLORATION AGREEMENT

         THIS RESTATED EXPLORATION AGREEMENT ("Agreement") is made and entered
into on the 30th day of June, 2000, between THE HOUSTON EXPLORATION COMPANY, a
Delaware corporation, of 1100 Louisiana Street, Suite 2000, Houston, Texas 77002
("THEC") and KEYSPAN EXPLORATION AND PRODUCTION, L.L.C., a Delaware limited
liability company, of One Metro Tech Center, 18th Floor, Brooklyn, New York
11201 ("KE&P").

                                   WITNESSETH:

         A. THEC and KE&P have entered into that certain Exploration Agreement
dated the 15th day of March 1999 between The Houston Exploration Company and
KeySpan Exploration and Production, L.L.C. ("Original Exploration Agreement");

         B. THEC and KE&P have entered into that certain First Amendment to
Exploration Agreement dated the 3rd day of November 1999 between The Houston
Exploration Company and KeySpan Exploration and Production L.L.C. ("First
Amendment"); and

         C. THEC and KE&P desire to further amend the Original Exploration
Agreement and to fully restate the Original Exploration Agreement, as previously
amended, in this Agreement.

         NOW, THEREFORE, FOR A VALUABLE CONSIDERATION, THEC and KE&P agree as
follows:

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                                   ARTICLE I.

                                   DEFINITIONS

         For purposes of this Agreement, unless otherwise expressly provided,
the terms defined below shall have the meanings assigned to them in this
Article. Other terms shall have the meaning assigned to them in the following
Articles. Such meanings shall apply equally to the singular and the plural,
unless the context in which they are used clearly requires otherwise.

         1.1 Abandonment Costs. The actual and direct costs, expenses and
liabilities incurred in the plugging and abandoning of a well, conducting
necessary site clearance relating to such well and removing any facilities used
in connection with such well.

         1.2 Acquisition Date. The later to occur of (a) the Commencement Date
or (b) the date on which THEC acquires a Working Interest in a Lease.

         1.3 AFE. An Authority for Expenditure.

         1.4 Annual Budget. Commencing for calendar year 2000, the amounts for
the G and A Costs, Drilling Costs and Development Costs approved by THEC and
KE&P for the relevant year. Additionally, the Annual Budget shall provide the
amount of the Intangible Costs that KE&P shall pay one hundred percent (100%)
thereof during the relevant year under Section 5.1

         1.5 Burdens. All royalties, overriding royalties, net profit interests,
production payments, back-in working interests and other burdens on production
from a Lease existing on the Acquisition Date of such Lease.

         1.6 Code: The Internal Revenue Code of 1986, as amended.

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         1.7 Development Costs. All of the actual and direct costs, expenses and
liabilities, including Intangible Costs, incurred for a Development Operation in
connection with a Lease.

         1.8 Development Costs Commitment. The amount of the Development Costs
contained in the Annual Budget for the relevant year allocated to KE&P in such
budget. For calendar year 2000, such amount is 11.875 million dollars.

         1.9 Development Operation. Any operation on a Lease after an
Exploratory Well has been drilled on such Lease under this Agreement for which
THEC prepares an internal or external AFE, whether or not required by the
relevant Operating Agreement, including but not limited to, the drilling,
completing and workover of wells, the construction and installation of Platforms
and other facilities and the installation of gathering lines and pipelines.

         1.10 Drilling Costs. All of the actual and direct costs, expenses and
liabilities, including Intangible Costs, incurred in connection with the
preparation for and the drilling, casing, testing, and logging of an Exploratory
Well on a Lease, and, if such well is plugged and abandoned, and the Abandonment
Costs relating to such well.

         1.11 Drilling Costs Commitment. The amount of the Drilling Costs,
Seismic Costs and Leasehold Costs contained in the Annual Budget for the
relevant year allocated to KE&P in such budget. For calendar year 2000, such
amount is 20.1 million dollars.

         1.12 Encumbrance. Any pledge, restriction, charge, lease, lien,
mortgage, security interest, contract obligation, option, claim, or other
encumbrance of any kind or character whatsoever.

         1.13 Exploratory Well. The first well drilled on a Lease included
within a Prospect pursuant to this Agreement.

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         1.14 G and A Costs. The actual costs incurred by THEC during the term
of this Agreement which are properly chargeable to THEC's Gross General and
Administrative Expense Account, the Office Furniture and Fixture Depreciation
Account and the Payroll Taxes Account in accordance with generally accepted
accounting principles as such accounts were maintained and compiled in THEC's
fiscal 1998 financial statements; provided that, such costs shall not be
included in any Drilling Costs, Development Costs or Operating Costs as either
an AFE cost or otherwise.

         1.15 G and A Costs Commitment. The amount of the G and A Costs
contained in the Annual Budget for the relevant year allocated to KE&P in such
budget. For calendar year 2000, such amount is 2.5 million dollars.

         1.16 Governmental Authority. The United States of America, any state,
commonwealth, territory or possession of the United States and any political
subdivision of any of the foregoing, including but not limited to courts,
departments, commissions, boards, bureaus, agencies or other instrumentalities.

         1.17 Hydrocarbons. Oil, gas, casinghead gas, gas condensate and all
other liquid and gaseous hydrocarbons (any one or more of them).

         1.18 Intangible Costs. All of the actual and direct costs, expenses and
liabilities incurred in connection with the preparation for and the drilling,
casing, testing, logging and, if necessary, plugging and abandoning of Wells on
the Leases that may be deducted as an expense under Section 263(c) of the Code.

         1.19 KE&P's Yearly Commitment. The amount of 100 million dollars for
the first year of the Primary Term, the amount of 34.475 million dollars for the
second year of the Primary Term and such amounts as are contained in the Annual
Budget for subsequent years of the Primary Term.

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         1.20 Leasehold Costs. All of the actual and direct costs, expenses and
liabilities incurred in acquiring Working Interests in the Leases (other than
THEC's Original Working Interests in the Leases described on Schedule I) under
Section 7.5 of this Agreement.

         1.21 Leases. The Oil and Gas Leases described on Schedule I to this
Agreement and such additional Oil and Gas leases as may be acquired under
Section 7.5 of this Agreement.

         1.22 Legal Requirements. Any law, statute, ordinance, decree,
requirement, order, judgment, rule or regulation of, including the terms of any
license or permit issued by, any Governmental Authority.

         1.23 Marketing Costs. All actual and direct costs, expenses and
liabilities paid to third parties relating to the treatment, gathering,
transportation, processing, and marketing of Hydrocarbons produced from a Lease.

         1.24 Net Proceeds. All gross revenues received from the sale of
Hydrocarbons produced from the Leases after deduction of all Burdens, Marketing
Costs and Taxes.

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         1.25 Operating Agreement. The existing operating agreement relating to
a Lease or, if there is no such operating agreement relating to a Lease, the
operating agreement subsequently negotiated between THEC and the Working
Interest owners in such Lease other than KE&P, or if there are no other such
owners, an operating agreement in the form attached hereto as Schedule II with
Exhibit "A" thereto being completed to contain the information with respect to
such Lease.

         1.26 Operating Costs. All of the actual and direct costs, expenses and
liabilities, of operating Wells and Leases, other than Drilling Costs,
Development Costs, G and A Costs, Marketing Costs, Abandonment Costs and Seismic
Costs, for which THEC does not prepare an internal or external AFE.

         1.27 Person: Any individual or legal entity, including but not limited
to, corporations, partnerships, limited liability companies and limited
partnerships.

         1.28 Platform. An offshore structure whether fixed, compliant, or
floating, and the components of that structure, including, but not limited to,
caissons or well protectors, rising above the water line and used for the
exploration, development, or production of Hydrocarbons from a Lease. The term
"Platform" shall also mean an offshore subsea structure or template (excluding
templates used for drilling operations) and any component thereof (including,
but not limited to, flow lines and control systems, other than those installed
in connection with completion of a well), that is attached to the sea floor and
used to obtain production of Hydrocarbons from the Lease.

         1.29 Platform Decision. An affirmative decision made by THEC relating
to a Well or Wells drilled on a Lease pursuant to this Agreement to set and pay
for a Platform and attempt to go on production.

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         1.30 Payout. The first day of the month following that point in time
when (a) the sum of (i) the amount of the total Net Proceeds attributable to a
Program Year received by KE&P plus (ii) the Program Year Tax Cash Benefits
Realized for such Program Year equals (b) the sum of (i) the amount of all
Abandonment Costs, Development Costs, Drilling Costs, Leasehold Costs, Marketing
Costs, Operating Costs, and Seismic Costs paid by KE&P relating to the Program
Leases included in such Program Year and the Wells located thereon and (ii) the
amount of G and A Costs paid by KE&P during such Program Year.

         1.31 Program Lease. A Lease will be a Program Lease for the particular
Program Year in which (a) an Exploratory Well is spudded on such Lease or (b) an
Exploratory Well is spudded on a Prospect which includes such lease, whichever
occurs first.

         1.32 Program Year. Each calendar year during the Primary Term of this
Agreement. A cost under this Agreement for purposes of Payout shall be
attributable to the Program Year in which an Exploratory Well is spudded on the
Lease to which such cost relates. If an Exploratory Well is not spudded on a
Lease during the Primary Term of this Agreement, the costs relating to such
Lease shall be used in the calculation of Payout for the Program Year in which
they were incurred. Net Proceeds shall be attributable to the Program Year in
which an Exploratory Well is spudded on the Lease to which such proceeds relate.

         1.33 Program Year Tax Cash Benefits Realized. The actual cash amount by
which the federal, state and local income tax of the MarketSpan Corporation
d/b/a KeySpan Energy consolidated group of companies was reduced as a result of
the deductibility of the Intangible Costs from the Leases and Wells paid by KE&P
attributable

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to a Program Year. Such amount shall be calculated separately for each Program
Year.

         1.34 Prospect. A geographical area, covered by one or more of the
Leases designated by THEC which appears to meet reasonable geologic, land and
economic criteria for the drilling of an Exploratory Well. After an Exploratory
Well is drilled on a Prospect, from time to time, THEC shall, if necessary,
enlarge or reduce the geographical area within such Prospect, both horizontally
and vertically, or either, to reflect geological, geophysical or economic
information not available at the time the Prospect is originally designated.

         1.35 Seismic Costs. All actual and direct costs, expenses and
liabilities of geological and geophysical information, including seismic data,
paid by THEC to third parties after the Commencement Date relating to the
Leases.

         1.36 Taxes. All local, state or federal, ad valorem, property, gross
production, severance, windfall profit, excise, occupation, gathering, and other
taxes and assessments of any kind whatsoever (but excluding taxes measured by or
based on income) based upon, measured by or charged against a Lease, the
production of Hydrocarbons or the receipt of proceeds therefrom.

         1.37 THEC's Original Working Interest. The Working Interest owned by
THEC in a Lease as set forth on Schedule I and any additional Working Interests
acquired by THEC pursuant to Section 7.5 of this Agreement.

         1.38 THEC's Program Budget. The sum of money for a calendar year that
THEC intends to expend on its share of the costs contemplated under this
Agreement.

         1.39 Well. Any well drilled on a Lease under this Agreement.

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         1.40 Working Interest. A right to search for and to produce
Hydrocarbons, or one or more of the components thereof, whether such right is
derived from ownership of lands in fee, from a lease covering lands, from a
record title interest or operating rights interest, from any contractual
relationship conferring such right, or from any other ownership or circumstances
granting such right, and which right bears the costs connected with the
exploration and drilling for and the production of Hydrocarbons.

                                   ARTICLE II.

                                      TERMS

         2.1 Primary Term. This Agreement shall be for a primary term (the
"Primary Term") commencing on January 1, 1999 ("Commencement Date") and ending
on the earliest to occur of the following:

                  (a) The last day of the calendar year during which THEC and
KE&P fail to agree on or before November 30th of such year on an Annual Budget
for the following calendar year;

                  (b) The last day of the calendar year during which either
party notifies the other party in writing on or before thirty (30) days before
the end of such year of its election to terminate the Primary Term at the end of
such year; or
                  (c) the mutual agreement of the parties; provided that, except
in case of (c), above, the Primary Term may not end prior to December 31, 2000.

         2.2 Secondary Term. This Agreement shall be for a secondary term (the
"Secondary Term") as to each Program Year commencing on the day the Primary Term
ends and ending on the earlier of:

                  (a) Payout of such Program Year; or

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                  (b) the mutual agreement of the parties.

                                  ARTICLE III.

                     REPRESENTATIONS AND WARRANTIES OF THEC

         As of the Commencement Date, THEC represents and warrants unto KE&P as
follows:

         3.1 Organization and Good Standing. THEC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own and lease
the properties and assets it currently owns and leases and to carry on its
business as such business is currently conducted. THEC is duly licensed or
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions in which the character of the properties and assets now owned or
leased by it or the nature of the business now conducted by it requires it to be
so licensed or qualified.

         3.2 Authority and Authorization of Agreement. THEC has all requisite
corporate power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated by this Agreement and to perform all
the terms and conditions of this Agreement to be performed by THEC. The
execution and delivery of this Agreement by THEC, the performance by it of all
the terms and conditions to be performed by it and the consummation of the
transactions contemplated by this Agreement have been duly authorized and
approved by all necessary corporate action.

         3.3 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered on behalf of THEC and constitutes the valid and binding
obligation of THEC, enforceable against it in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency or other laws
relating to or affecting the

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enforcement of creditors' rights generally and general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).

         3.4 No Violations. This Agreement and its execution and delivery by
THEC does not, and the fulfillment and compliance with the terms and conditions
of this Agreement and the consummation of the transactions contemplated will
not:

                  (a) conflict with, or require the consent of any Person under
the Certificate of Incorporation or Bylaws of THEC;

                  (b) violate any provision of, or, require any filing, consent,
authorization, notice or approval under, any Legal Requirement applicable to or
binding upon THEC (assuming receipt of all routine governmental consents
typically received after consummation of transactions of the nature contemplated
by this Agreement);

                  (c) conflict with, result in a breach of, constitute a default
under (without regard to requirements of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance required by, or require
any consent, authorization or approval under (i) any mortgage, indenture, loan,
credit agreement or other agreement or instrument evidencing indebtedness for
borrowed money to which THEC is a party or by which it is bound or to which any
of the Leases are subject or (ii) any license, contract or other agreement or
instrument to which THEC is a party or by which it is bound or which any of its
properties is subject; or

                  (d) result in the creation or imposition of any lien, charge
or other encumbrance upon the Leases.

         3.5 No Default. THEC is not in material default under, and no condition
exists that with notice or lapse of time or both would constitute a default by
it under, (i) any order,

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judgment or decree of any Governmental Authority or (ii) any agreement,
contract, lease, license, permit or other instrument.

         3.6 Compliance. THEC is in material compliance with all Legal
Requirements applicable to its current business and operations and the Leases.

         3.7 Rights and Consents. Except as set forth on Schedule I, none of the
Leases are subject to a preferential right to purchase or a consent to assign
which has not been waived or obtained.

         3.8 Environmental Matters. The Leases have been operated and are in
substantial compliance with all applicable environmental Legal Requirements.

         3.9 Status and Operation of the Leases.

                  (a) The Leases and other agreements under which THEC holds the
THEC Original Working Interests in the Leases are in full force and effect in
accordance with their respective terms;

                  (b) THEC has not received a written notice of default that
remains outstanding or uncured under the Leases or other agreements under which
THEC holds the THEC Original Working Interests in the Leases;

                  (c) THEC's Original Working Interests in the Leases are not
subject to any advance, "take-or-pay" or other similar payments under production
sales contracts that entitle the buyers to "make up" or otherwise receive
deliveries of Hydrocarbons at any time without paying at such time the
applicable contract price; and

                  (d) There is no personal property, mixed property or real
property located on the Leases for which THEC has any responsibility.

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         3.10 Litigation.

                  (a) There is no material action, suit or proceeding pending
or, to the best of THEC's knowledge, threatened against THEC or the Leases; and

                  (b) THEC is not charged with a written violation of, or to the
best of THEC's knowledge, threatened with a charge of a violation of, any Legal
Requirement relating to the Leases or any aspect of its business relating to the
Leases.

         3.11 Descriptions. Schedule I contains an accurate description of the
Leases and THEC's Original Working Interests in such Leases.

         3.12 Liens. THEC's Original Working Interests in the Leases are not
subject to any mortgage, deed of trust, security agreement, financing statement
or other lien.

                                   ARTICLE IV.

                     REPRESENTATIONS AND WARRANTIES OF KE&P

         As of the Commencement Date, KE&P represents and warrants unto THEC as
follows:

         4.1 Organization and Good Standing. KE&P is a limited liability company
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization.

         4.2 Authority and Authorization of Agreement. KE&P has all requisite
power and authority to execute and deliver this Agreement, to consummate the
transactions contemplated by this Agreement and to perform all the terms and
conditions of this Agreement to be performed by KE&P. The execution and delivery
of this Agreement by KE&P, the performance by KE&P of all the terms and
conditions to be performed by it and

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the consummation of the transactions contemplated by this Agreement have been
duly authorized and approved by all necessary action.

         4.3 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered by KE&P and constitutes the valid and binding obligation
of KE&P, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other laws relating
to or affecting the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).

         4.4 No Violations. This Agreement and its execution and delivery by
KE&P do not, and the fulfillment and compliance with the terms and conditions of
this Agreement and the consummation of the transactions contemplated will not:

                  (a) conflict with, or require the consent of any Person under
the organizational documents of KE&P;

                  (b) violate any provision of, or, require any filing, consent,
authorization or approval under, any Legal Requirement applicable to or binding
upon KE&P (assuming receipt of all routine governmental consents typically
received after consummation of transactions of the nature contemplated by this
Agreement); or
                  (c) conflict with, result in a breach of, constitute a default
under (without regard to requirement of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance required by, or require
any consent, authorization or approval under, (i) any mortgage, indenture, loan,
credit agreement or other agreement or instrument evidencing indebtedness for
borrowed money to which KE&P is a party or by which KE&P is bound or to which
any of its properties is subject or (ii) any lease, license,

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contract or other agreement or instrument to which KE&P is a party or by which
it is bound or to which any of its properties is subject.

         4.5 Litigation. There is no action, suit, proceeding or governmental
investigation or inquiry pending, or to the knowledge of KE&P, threatened
against KE&P or any of its properties that might delay, prevent or hinder the
consummation of the transactions contemplated by this Agreement.

         4.6 Knowledgeable Investor. KE&P is an experienced and knowledgeable
investor in the oil and gas business. Prior to entering into this Agreement,
KE&P was advised by, and it has relied solely on, its own legal, tax and other
professional counsel concerning this Agreement, the Leases and their value. KE&P
is acquiring interests in the Leases under this Agreement for its own account
and not for distribution.

                                   ARTICLE V.

                         ALLOCATION AND PAYMENT OF COSTS

                  5.1 Allocation of IDCs. Subject to Section 5.4, during the
Primary Term, KE&P shall pay one hundred percent (100%) of all Intangible Costs
attributable to THEC's Original Working Interests in the Leases until KE&P has
paid Intangible Costs for the first year of the Primary Term totaling 20.700
million dollars, for the second year of the Primary Term totaling 7.667 million
dollars and for subsequent years of the Primary Term such amounts as are
included in the Annual Budgets for such years and, thereafter during each year
of the Primary Term after the foregoing dollar amount for such year has been
met, KE&P shall pay fifty one and seventy five one hundredths percent (51.75%)
of all Intangible Costs attributable to THEC's Original Working Interests in the
Leases and THEC shall pay forty eight and twenty five one hundredths percent
(48.25%) of all Intangible Costs attributable to THEC's Original Working
Interest in the Leases. During the

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Secondary Term, KE&P shall pay fifty one and seventy five one hundredths percent
(51.75%) of all Intangible Costs attributable to THEC's Original Working
Interest in the Leases and THEC shall pay forty eight and twenty five one
hundredths percent (48.25%) of all Intangible Costs attributable to THEC's
Original Working Interest in the Leases; provided that, KE&P shall have no
obligation to pay Intangible Costs to the extent such costs relate to a Lease
reassigned to THEC under Section 6.5 and such costs accrue after the Primary
Term.

         5.2 Allocation of G and A Costs. During the Primary Term, KE&P shall
pay forty five percent (45%) of seventy percent (70%) of G and A Costs during
the first year of the Primary Term and the amount of the G and A Costs
Commitment for the relevant year for subsequent years of the Primary Term. THEC
shall pay all remaining G and A Costs.

         5.3 Allocation of Remaining Costs. Subject to Section 5.4 and 5.8,
during the Primary Term and the Secondary Term, KE&P shall pay forty five
percent (45%) of all Drilling Costs, Development Costs, Seismic Costs, Leasehold
Costs, Abandonment Costs and Operating Costs attributable to THEC's Original
Working Interest in the Leases and THEC shall pay fifty five percent (55%) of
all Drilling Costs, Development Costs, Seismic Costs, Leasehold Costs,
Abandonment Costs and Operating Costs attributable to THEC's Original Working
Interest in the Leases; provided that, KE&P shall have no obligation to pay any
of such costs to the extent such costs relate to a Lease reassigned to THEC
under Section 6.5 and such costs accrue after the Primary Term.

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         5.4 Primary Term Commitment. KE&P's obligation to pay the costs
specified in Sections 5.1 and 5.3 incurred during any year of the Primary Term
is limited to (a) KE&P's Yearly Commitment for the first year of the Primary
Term and (b) the Drilling Costs Commitment and the Development Costs Commitment
for the relevant year during subsequent years of the Primary Term subject to the
following:

                  (i) If THEC determines that the allocation to KE&P of its
share of (aa) the Drilling Costs of an Exploratory Well on a Lease will result
in the Drilling Costs Commitment for the relevant year being exceeded or (bb)
the Development Costs for an operation on a Lease will result in the Development
Costs Commitment for the relevant year being exceeded, THEC shall notify KE&P in
writing of such fact prior to commencing such well or operation. Within thirty
(30) days (or such lesser period specified in the notice if the proposed spud
date of such well or the commencement date of such operation is less than thirty
(30) days from the date of such notice) after receiving such notice, KE&P shall
notify THEC in writing whether or not it approves such well or operation. If
KE&P approves such well or operation, KE&P's share of the costs related thereto
shall be deemed "Excess Costs"; and, to the extent the Excess Costs result in
the Drilling Costs Commitment or Development Costs Commitment being exceeded,
such commitment shall be increased accordingly for such year. If KE&P does not
approve such well or such operation or fails to notify THEC of its decision,
KE&P, in the case of (aa), above, shall forfeit its interests in such well and
the Lease on which it is located and, in the case of (bb), above, shall be
deemed to have elected under the applicable Operating Agreement to not
participate in the relevant operation and the consequences under the applicable
Operating Agreement of such failure to participate shall be fully applicable to
KE&P and its interest in the relevant Lease.

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                  (ii) Except as provided in Section 5.4(i), if KE&P is not
obligated to pay a portion of its share of the costs specified in Sections 5.1
and 5.3 during any year of the Primary Term, because its share exceeds in whole
or in part KE&P's Drilling Costs Commitment or Development Costs Commitment and
THEC pays such costs, THEC shall receive KE&P's share of Net Proceeds from all
Wells drilled under this Agreement until such time as THEC has received a sum of
money (exclusive of all Burdens, Marketing Costs and Taxes) out of such share
equal to KE&P's share of costs which were paid by THEC.

                  (iii) All Drilling Costs and Development Costs for purposes of
applying the limitations of the Drilling Costs Commitment and Development Costs
Commitment shall, at the election of THEC, be deemed to have been incurred
entirely on the date THEC submits to KE&P the information set forth in Section
7.3 relating to the applicable operation, the date of the AFE relating to the
expenditure of such costs, or the date on which such costs are paid by THEC,
rather than on the date such costs are actually incurred.

                  (iv) The portion of KE&P's Yearly Commitment for the year 1999
not expended or committed for expenditure by December 31, 1999 shall not be
available for use during the subsequent years of the Primary Term.

         5.5 Invoices. THEC shall invoice KE&P monthly for KE&P's share of all
costs, except G and A Costs as they accrue. At the beginning of 1999, THEC shall
estimate the G and A Costs for such year and THEC shall invoice KE&P at the
beginning of each calendar quarter for its share of one fourth (1/4) of such
estimate. After the actual G and A Costs for such year are determined, THEC
shall make appropriate adjustments and shall

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either invoice KE&P for its share of any amounts in excess of such estimate or
shall refund to KE&P its share of the amount by which actual costs are less than
such estimate. In 2000 and subsequent years of the Primary Term, THEC shall
invoice KE&P at the beginning of each calendar quarter for one fourth (1/4) of
the G and A Costs Commitment for such year.

         5.6 Prepaid Costs. If THEC is required to prepay, either directly or
through an escrow arrangement, all or any portion of any costs, THEC shall
immediately invoice KE&P for KE&P's share of such prepayment.

         5.7 Payment. Except as provided in the following sentence, KE&P shall
pay all invoices within thirty (30) days of their receipt except KE&P shall pay
all invoices relating to G and A Costs within forty-five (45) days after their
receipt. If the payment of an invoice for Drilling Costs and Development Costs
would result in KE&P having paid during the relevant year Drilling Costs and
Development Costs in excess of the product of (a) the number of the month of the
year in which such payment is due times (b) one twelfth (1/12) of the amount of
the Drilling Costs Commitment and the Development Costs Commitment for the
relevant year, KE&P may delay the payment of such excess until it is eliminated
in subsequent months. For example, (a) if in April an invoice for 2 million
dollars for Drilling Costs and Development Costs is due, (b) the Drilling Costs
Commitment and Development Costs Commitment for such year are 10 million dollars
and (c) the Drilling Costs and Development Costs due and paid for January and
February were 2 million dollars, KE&P would be obligated to pay such month only
$1.33 million of such costs during April and could delay payment of the
remaining 0.667 million dollars of costs until a subsequent month when the
excess was eliminated. In the event an invoice should not be timely paid,

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the amount of such invoice shall bear interest at ten percent (10%) per annum
until such invoice and interest thereon is paid to THEC.

         5.8 Abandonment Costs. At the end of the Secondary Term for a Program
Year, THEC shall prepare and submit to KE&P a reasonable good faith estimate of
the Abandonment Costs related to those Wells and Platforms jointly owned by THEC
and KE&P and located on the Program Leases for such Program Year. To the extent
KE&P has not previously paid its share of such Abandonment Costs, KE&P shall
either immediately pay to THEC forty-five percent (45%) of such costs or THEC
shall be entitled to all revenues to which KE&P is entitled under the Net
Profits Agreement relating to such Program Year until THEC has received an
amount equal to forty-five percent (45%) of such costs. After recovering such
costs, THEC shall be solely responsible for the Abandonment Costs related to
such Wells and Platforms.

                                   ARTICLE VI.

                          LAND AND EXPLORATION PROGRAM

         6.1 Prospects. During the Primary Term of this Agreement, THEC, on
behalf of THEC and KE&P, shall use reasonable good faith efforts to:

                  (a) identify Prospects within the Leases; and

                  (b) drill one (1) or more Exploratory Wells on each Prospect,
where warranted, as determined solely by THEC, and will supervise the drilling
of such well or wells as a prudent operator where it is the "Operator" under the
relevant Operating Agreement; provided that, KE&P acknowledges that THEC may
determine not to drill some of the Leases because of changed conditions or new
information or interpretations that may exist at the time of such determination.

                                       20
<PAGE>   21

         6.2 Operations. During the Primary Term and the Secondary Term, THEC,
where it is the "Operator" under the applicable Operating Agreements, on behalf
of THEC and KE&P, shall use reasonable good faith efforts to:

                  (a) develop each Lease jointly owned by THEC and KE&P as a
prudent operator in accordance with the Operating Agreement relating to such
Lease; and

                  (b) operate the Wells located on each Lease as a prudent
operator in accordance with the Operating Agreement relating to such Lease as
long as it reasonably believes it is in the best interest of KE&P and THEC for
it to do so.

         6.3 Initial Assignment. Subject to Section 6.4, as soon after the
execution of this Agreement as KE&P is qualified with the Minerals Management
Service of the Department of the Interior ("MMS") to own Oil and Gas Leases in
the Outer Continental Shelf, THEC shall assign and convey to KE&P legal title to
an undivided forty five (45%) percent of THEC's Original Working Interests in
and to the Leases. THEC and KE&P acknowledge that for federal income tax
purposes the assignment of such legal title shall be treated as a capital
contribution by THEC to a partnership as provided in Section 4 of the Tax
Agreement attached hereto as Schedule V. Each assignment shall comport
substantially with the form of assignment attached hereto as Schedule III, shall
contain a special warranty of title and shall provide that the Working Interests
assigned and conveyed shall bear and be burdened by a proportionate part of:

                  (a) the terms, provisions and obligations set forth in the
Leases;

                  (b) the terms, provisions and obligations set forth in any
contract, agreement or assignment relating to the assigned Working Interests;

                                       21
<PAGE>   22

                  (c) all Burdens to which the acquired Working Interests are
subject as of the Acquisition Date;

                  (d) the terms, provisions and obligations set forth in the
Operating Agreements;

                  (e) the terms, provisions and obligations set forth in this
Agreement;

                  (f) the obligation of KE&P to reassign to THEC at the end of
the Primary Term its entire interest in those Leases, free and clear of all
Encumbrances, that are not included in Prospect upon which an Exploratory Well
has been drilled; and

                  (g) the obligation of KE&P to reassign to THEC at the end of
the Secondary Term relating to a Program Year all its remaining interests in the
Program Leases for such Program Year, such reassignment to contain the same
special warranty of title contained in the initial assignment.

         6.4 Inability to Assign. In the event THEC cannot assign to KE&P its
undivided forty five percent (45%) of THEC's Original Working Interest in a
Lease because of an existing contractual requirement, a Legal Requirement or the
unadviseability of doing so in the reasonable opinion of THEC, THEC shall hold
KE&P's interest in such Lease as nominee and on behalf of KE&P.

         6.5 Reassignment. At the end of the Primary Term, KE&P shall assign and
convey to THEC its acquired Working Interests in those Leases, free and clear of
all Encumbrances, that are not included in a Prospect, upon which an Exploratory
Well has been drilled. At the end of the Secondary Term relating to a Program
Year, KE&P shall assign to THEC all of its acquired Working Interest in the
Program Leases for such Program Year free and clear of all Encumbrances. For
federal income tax purposes,

                                       22
<PAGE>   23

THEC and KE&P agree that any such assignments shall be treated as a distribution
to THEC of assets in kind by a partnership in accordance with Section 6 of the
Tax Agreement attached hereto as Schedule V.

         6.6 Net Profits Agreement. At the end of the Secondary Term relating to
a Program Year, THEC shall execute and deliver to KE&P the Conveyance of Net
Profits Interest (the "Net Profits Agreement") attached hereto as Schedule IV
(with Exhibit A thereto completed to include the Program Leases for such Program
Year and the Wells located within such Program Leases) entitling KE&P to
forty-five percent (45%) of the Net Proceeds, as defined therein, derived from
such Wells.

         6.7 Qualification. As soon as possible after the execution of this
Agreement, KE&P will qualify with the MMS to own Oil and Gas Leases in the Outer
Continental Shelf.

         6.8 Bond. As soon as possible after the execution of this Agreement,
KE&P will take all necessary action so that on the assignment to it of the
Working Interests described in Section 6.1, it can meet all bonding requirements
of the MMS. Thereafter, KE&P shall take all necessary action to remain in
compliance with all bonding requirements of the MMS and shall pay its
proportionate share of any supplemental bonds required of THEC by the MMS
relating to the Leases. In addition, if at any time THEC determines in its sole
discretion that a reserve fund is necessary to meet any future Abandonment
Costs, KE&P shall pay all of its share of Net Proceeds relating to the Leases to
THEC until such time as THEC has collected sufficient funds to pay KE&P's share
of such costs. After THEC has recovered such costs from KE&P, THEC shall be
solely responsible for such costs.

         6.9 Transfer. If at any time THEC believes in its sole discretion that
it is advisable to assign, farmout, trade or otherwise transfer (collectively, a
"Transfer") a Lease

                                       23
<PAGE>   24

or pool or unitize a Lease or a part thereof, KE&P at the request of THEC shall
join with THEC in such action as long as KE&P receives its proportionate share
of the consideration for such Transfer. If all or part of such consideration is
an interest in an Oil and Gas Lease, such lease shall become a Lease under the
term of this Agreement. For the purposes of this Agreement, THEC's Original
Working Interests in such Lease or Leases shall be the Working Interest in such
Lease acquired by both THEC and KE&P.

                                  ARTICLE VII.

                            MANAGEMENT OF OPERATIONS

         7.1 Personnel. During the terms of this Agreement, THEC shall use and
maintain:

                  (a) an experienced and trained exploration staff to conduct
geological and geophysical evaluations;

                  (b) an experienced and trained engineering staff or
engineering consultants to supervise drilling, completion and operation of all
Wells drilled pursuant to the provisions of this Agreement;

                  (c) an experienced and trained accounting staff to provide
accounting services required pursuant to the provisions of this Agreement,
including reconciliations of the expenses incurred by the parties;

                  (d) an experienced and trained land and lease records staff
for maintenance of all leaseholds including the payment of bonuses, delay
rentals, royalties and other functions considered necessary; and

                  (e) such lease brokers, professional consultants and such
other third party services as are necessary to implement this Agreement.

         7.2 Decisions.

                                       24
<PAGE>   25

                  (a) Except as provided in (b), below, during the terms of this
Agreement, all decisions relating to the geological, geophysical and economic
evaluations of the Leases, the incurrence of costs, expenses and liabilities
relating to the Leases, the drilling of Exploratory Wells on the Leases, the
conducting of Development Operations on the Leases and all other operational
matters pertaining to the Leases and the Wells drilled thereon shall be within
the sole and exclusive discretion of THEC provided, however, that all decisions
made by THEC regarding KE&P's interests shall be consistent with the decisions
made by THEC regarding its interests. Any decision granted to KE&P under an
Operating Agreement shall be made by KE&P in a manner consistent with the
direction and instruction of THEC.

                  (b) During the Secondary Term, if KE&P's Working Interest
share of the AFE cost of any operation on a Lease, other than an operation
mandated by any Governmental Authority or Legal Requirement, would exceed one
million dollars ($1,000,000), KE&P shall have the option not to participate in
such operation. On or before sixty (60) days before such operation is to
commence, THEC shall notify KE&P in writing of such operation and the existence
of KE&P's option not to participate in such operation. On or before thirty (30)
days after its receipt of such notice, KE&P shall notify THEC in writing if it
elects not to participate in such operation. If KE&P fails to timely notify THEC
of its election not to participate, KE&P shall have waived its option. In the
event KE&P timely notifies THEC of its election not to participate in such
operation, KE&P shall not be obligated to pay its Working Interest share of the
costs of such operation, but if such operation is the drilling of a well, KE&P
shall relinquish to THEC all of its interest in such well and all subsequent
wells drilled on the relevant Lease; if the operation is the construction and
installation of a Platform, KE&P shall relinquish to THEC all of its interest

                                       25
<PAGE>   26

in any wells drilled or produced in connection with such Platform; and if such
operation is any other operation necessary to commence, enhance or restore
production, KE&P shall relinquish to THEC all of its interest in the production
commenced, enhanced or restored; provided that, if such operation is necessary
to maintain the relevant Lease in force and effect, KE&P shall relinquish to
THEC its entire interest in such lease. KE&P shall immediately assign to THEC
the relinquished interest and such interest shall be excluded from the Net
Profits Agreement relating to the relevant Program Year.

         7.3 Information. Upon the commencement of an Exploratory Well or a
Development Operation on a Lease, if THEC has not previously done so, THEC shall
submit to KE&P the following:

                  (a) if the commenced operation is a well, an AFE reflecting
the estimated dry hole and completion costs (or temporary abandonment) to be
incurred in the drilling of the well to the proposed depth at the location
specified therein, testing, completing and equipping or plugging and abandoning
the same;

                  (b) if the commenced operation is other than a well, an AFE
reflecting the estimated cost of the operation and a brief description of the
operation and the intended results of such operation; and

                  (c) such other information or data relating to the well as
KE&P may reasonably request and THEC may have reasonably available.

If THEC fails to submit any of the foregoing, or fails to submit any changes in
the foregoing to KE&P, THEC shall do so immediately on request by KE&P, but such
failure shall not reduce or affect KE&P's obligations under this Agreement.

         7.4 Reports and Tests. At the request of KE&P, THEC shall furnish to
KE&P daily drilling reports and copies of logs, drill stem tests and electrical
surveys, as well as

                                       26
<PAGE>   27

reports of geologists or other consultants furnished to THEC in the course of
the exploration, drilling or any other operations on the Leases. Subject to
reasonable limitations by THEC, KE&P or its duly authorized representatives
shall have access at all reasonable times, at its and their sole risk and
expense, to the platform or derrick floor of any Well drilled hereunder;
provided that, all such access must be prearranged through THEC.

         7.5 Additional Working Interest. During the terms of this Agreement,
the decision to acquire an additional Working Interest in a Lease shall be in
the sole discretion of THEC. Any additional Working Interest in a Lease acquired
by THEC shall be owned by THEC and KE&P in the same proportion as the other
Working Interests in the Lease owned by them and the cost of such acquisition
shall constitute a Leasehold Cost. If KE&P should have the opportunity to
acquire a Working Interest in a Lease by means other than under this Agreement,
KE&P shall immediately notify THEC of such opportunity and THEC shall have the
right to exercise such opportunity.

         7.6 Meetings. THEC and KE&P agree to meet monthly during the first year
of this Agreement and thereafter at quarterly intervals to discuss the overall
management of the Prospects and the latest developments in connection therewith
to the end that both parties will be fully informed as to the status thereof and
plans for the evaluation of the Leases and the drilling and producing of Wells
situated thereon.

         7.7 Reporting. Commencing at the end of the Primary Term and continuing
annually thereafter, KE&P shall deliver to THEC a report setting forth the
cumulative Program Year Tax Cash Benefits Realized for each Program Year.

                                       27
<PAGE>   28

                                  ARTICLE VIII.

                       NET PROCEEDS, MARKETING AND HEDGES

         8.1 Net Proceeds. During the terms of this Agreement, THEC shall pay to
KE&P its Working Interest share of Net Proceeds from the Leases within thirty
(30) days after such proceeds are received by THEC.

         8.2 Marketing. During the terms of this Agreement, THEC shall market
KE&P's Working Interest share of the Hydrocarbons produced from the Leases. If
at any time KE&P elects to market its Working Interest share of such
Hydrocarbons, KE&P shall notify THEC in writing at least thirty (30) days before
such election is to be effective and shall be responsible for all Burdens, Taxes
and Marketing Costs relating to its Working Interest share of such Hydrocarbons
during the period such election is in force.

         8.3 Hedging. During the terms of this Agreement, THEC, on behalf of
KE&P, will follow THEC's hedging strategy insofar as KE&P's share of the
Hydrocarbons produced from the Leases unless KE&P notifies THEC in writing
otherwise.

                                  ARTICLE IX.

                        NO PARTNERSHIP AND NO FIDUCIARY

         9.1 No Partnership etc. This Agreement and the operations contemplated
under this Agreement are not intended to and shall not be construed to create a
partnership, joint venture, mining partnership or other partnership or
association or to render THEC and KE&P liable as partners other than for income
tax purposes. THEC and KE&P expressly agree that neither party shall be
responsible for the obligations of the other party, each

                                       28
<PAGE>   29

party being severally responsible only for its obligations arising hereunder and
liable only for its allocated share of the costs and expenses incurred
hereunder.

         9.2 Fiduciary. It is expressly agreed and acknowledged that THEC shall
not have any fiduciary obligations to KE&P under this Agreement and, except as
otherwise expressly provided in this Agreement, THEC's sole obligation to KE&P
shall be as an "Operator" to a "Non-Operator" under the Operating Agreements
where THEC is the Operator under such Operating Agreements. Further, it is
agreed and acknowledged that this Agreement is strictly limited to the Leases,
and except as provided in Sections 6.9 and 7.5, THEC shall have no obligation
whatsoever to KE&P relating to any other Oil and Gas Lease or other property it
currently owns or may acquire in the future even if such leases or leases
competes with one or more of the Leases for the production of Hydrocarbons.

                                   ARTICLE X.

                         ACCOUNTING, RECORDS AND BUDGET

         10.1 G and A Costs. During the first year of the Primary Term of this
Agreement, THEC shall submit to KE&P:

                  (a) within sixty (60) days of the end of each quarter, the G
and A Costs for the pertinent period, including a certification by the chief
accounting officer of THEC that the Gross General and Administration Account,
the Office Furniture and Fixtures Depreciation Account and Payroll Taxes Account
have been compiled in accordance with generally accepted accounting principles;
and

                  (b) within sixty (60) days of the end of each fiscal year of
THEC, an opinion prepared by a national firm of certified public accountants
opining that the Gross General and Administration Account, the Office Furniture
and Fixture Depreciation Account and Payroll Taxes Account set forth in the
quarterly and annual financial statements for

                                       29
<PAGE>   30

such fiscal year were prepared in accordance with generally accepted accounting
principles.

         10.2 Accounting. As soon as practicable after the end of each month
during the term of this Agreement, THEC shall submit to KE&P a statement of all
receipts and disbursements for such month relating to the operations under this
Agreement.

         10.3 Audit. THEC shall make available to KE&P or its representatives,
at its reasonable request and at reasonable times, such records, invoices,
receipts and other materials within its control which are reasonably necessary
for a complete and proper audit by KE&P of any of the operations conducted by
THEC under this Agreement or the Operating Agreements. THEC shall provide any
and all assistance reasonably requested by KE&P or its representatives in
connection with a review or audit of such operations.

         10.4 Budgets. THEC shall submit annually to the Management Committee
THEC's Program Budget and a yearly budget setting forth the anticipated
financial requirements of KE&P under this Agreement. Commencing in 2000, THEC
shall submit quarterly to the Management Committee THEC's Program Budget and a
quarterly budget setting forth the anticipated financial requirements of KE&P
under this Agreement. Such budgets for the first year shall be submitted on or
before March 31, 1999 and the budgets for the following years during the terms
on or before the first day of each calendar quarter.

         10.5 Management Committee. The Management Committee shall be composed
of the President, Treasurer and Controller of THEC and the President, Chief
Financial Officer and Controller of KE&P.

                                       30
<PAGE>   31

                                   ARTICLE XI.

                                    INSURANCE

         11.1 Coverage. During the terms of this Agreement, THEC shall maintain
for the benefit of THEC and KE&P insurance coverage consistent with good policy
and the cost of such coverage shall be included in Operating Costs.

                                  ARTICLE XII.

                         CONFIDENTIALITY OF INFORMATION

         12.1 Agreement. THEC and KE&P shall hold the terms and conditions
hereof, as well as the existence of this Agreement, in strict confidence, and
shall make no disclosure with respect hereto, publicly or privately, other than
(a) as agreed upon by the parties, (b) as necessary to their respective
advisers, (c) as required by applicable law, or (d) if, in the opinion of
counsel to THEC or KE&P, such disclosure is necessary by reason of stock
exchange requirements or S.E.C. requirements; provided, however, that in any
event the disclosing party shall notify the other party and provide such party
with a copy of any disclosure document prior to such disclosure and an
opportunity to discuss the contents thereof with the disclosing Party.

         12.2 Information. THEC and KE&P shall hold all information relating to
the Leases and Prospects in strict confidence other than (a) as agreed upon by
the parties, (b) as required by applicable law, (c) as necessary to their
respective advisers, (d) as required by contracts between THEC and third
parties, and (e) as required by responsible reserve engineering firms and
financial institutions.

                                  ARTICLE XIII.

                                  INCOME TAXES

         13.1 Tax Matters. All matters relating to income taxes shall be
administered as set forth in the Tax Agreement attached hereto as Schedule V.

                                       31
<PAGE>   32

                                  ARTICLE XIV.

                            EXTENT OF REPRESENTATIONS
                       AND WARRANTIES AND INDEMNIFICATIONS

         14.1 Scope of Representations of THEC.

                  (a) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS
AGREEMENT, THEC MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, AND DISCLAIMS
ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR
INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO KE&P (INCLUDING ANY
OPINION, INFORMATION OR ADVICE WHICH MAY HAVE BEEN PROVIDED TO KE&P BY ANY
AFFILIATE, OFFICER, DIRECTOR, STOCKHOLDER, PARTNER, EMPLOYEE, AGENT, CONSULTANT
OR REPRESENTATIVE OF THEC OR BY ANY INVESTMENT BANK OR INVESTMENT BANKING FIRM,
ANY PETROLEUM ENGINEER OR ENGINEERING FIRM, THEC'S COUNSEL OR ANY OTHER AGENT,
CONSULTANT OR REPRESENTATIVE).

                  (b) KE&P acknowledges and affirms that it has had full access
to information with respect to the Leases. KE&P has made its own independent
investigation, analysis and evaluation of the transactions contemplated by this
Agreement (including KE&P's own estimate and appraisal of the extent and value
of THEC's Hydrocarbon reserves attributable to the Leases and an independent
assessment and appraisal of the environmental risks associated with the
acquisition of the Leases).

         14.2 INDEMNIFICATION OF THEC. THEC AGREES TO RELEASE, INDEMNIFY AND
HOLD KE&P HARMLESS FROM AND AGAINST, ANY LOSS, DAMAGE, EXPENSE

                                       32
<PAGE>   33

(INCLUDING REASONABLE ATTORNEYS' FEES) CAUSE OF ACTION, FINE, PENALTY OR
LIABILITY SUSTAINED BY KE&P ARISING OUT OF OR RESULTING FROM (a) ANY BREACH OF
ANY OF THE REPRESENTATIONS, WARRANTIES OR COVENANTS MADE BY THEC IN THIS
AGREEMENT OR (b) ANY MATTER, EVENT, CONDITION, CIRCUMSTANCE, ACTION OR OMISSION
RELATING TO A LEASE TO THE EXTENT SUCH LOSS, DAMAGE EXPENSE (INCLUDING
REASONABLE ATTORNEYS' FEES) CAUSE OF ACTION, FINE, PENALTY OR LIABILITY EXCEEDS
KE&P'S WORKING INTEREST PERCENTAGE OF THE TOTAL LOSS, DAMAGE OR EXPENSE RELATING
TO SUCH LEASE.

         14.3 INDEMNIFICATION OF KE&P. KE&P AGREES TO RELEASE, INDEMNIFY AND
HOLD THEC HARMLESS FROM AND AGAINST, ANY LOSS, DAMAGE, EXPENSE (INCLUDING
REASONABLE ATTORNEYS' FEES) CAUSES OF ACTION, FINE, PENALTY OR LIABILITY
SUSTAINED BY THEC (a) ARISING OUT OF OR RESULTING FROM ANY BREACH OF ANY OF THE
REPRESENTATIONS, WARRANTIES OR COVENANTS MADE BY KE&P IN THIS AGREEMENT, (b) ANY
MATTER, EVENT, CONDITION, CIRCUMSTANCE, ACTION OR OMISSION RELATING TO A LEASE
(OTHER THAN AS A RESULT OF THEC'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT) TO THE
EXTENT OF KE&P'S WORKING INTEREST PERCENTAGE OF THE TOTAL LOSS, DAMAGE, EXPENSE
(INCLUDING REASONABLE ATTORNEYS' FEES) RELATING TO SUCH LEASE;

         14.4 COMPLIANCE WITH THE EXPRESS NEGLIGENCE TEST. THE PARTIES AGREE
THAT THE OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED
PARTY SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR

                                       33
<PAGE>   34

STRICT LIABILITY OF THE INDEMNIFIED PARTY (BUT NOT THE GROSS NEGLIGENCE OR
WILFUL MISCONDUCT), WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE,
PASSIVE, JOINT, CONCURRENT OR SOLE.

         14.5 Indemnification Procedures. All claims for indemnification under
this Agreement will be asserted and resolved as follows:

                  (a) An indemnified party will promptly (i) notify an
indemnifying party of any third-party claim asserted against the indemnified
party and (ii) transmit to the indemnifying party a claim notice relating to
such third-party claim, a copy of all papers served with respect to such claim
(if any), an estimate of the amount of damages attributable to the third-party
claim and the basis of the indemnified party's request for indemnification under
this Agreement. Within thirty (30) days of such notice (the "Election Period")
the indemnifying party will notify an indemnified party (A) whether the
indemnifying party disputes its potential liability to the indemnified party
with respect to such third-party claim and (B) whether the indemnifying party
desires, at the sole cost and expense of such indemnifying party, to defend the
indemnified party against such third-party claim.

                  (b) If an indemnifying party notifies an indemnified party
within the Election Period that the indemnifying party does not dispute its
potential liability to the indemnified party under this Agreement and that the
indemnifying party elects to assume the defense of the third-party claim, then
the indemnifying party will have the right to defend, at its sole cost and
expense, such third-party claim by all appropriate proceedings, which
proceedings will be prosecuted diligently by the indemnifying party to a final
conclusion or settled at the discretion of the indemnifying party in accordance
with this Section 14.5(b). The indemnifying party will have full control of such
defense and proceedings, including any compromise or settlement of the
third-party claim; provided

                                       34
<PAGE>   35

that, any settlement entailing nonmonetary consideration must be approved, in
advance, by the indemnified party, which approval will not be unreasonably
withheld. The indemnified party is authorized, at the sole cost and expense of
the indemnifying party (but only if the indemnified party is actually entitled
to indemnification under this Agreement or if the indemnifying party assumes the
defense with respect to the third-party claim), to file, during the Election
Period, any motion, answer or other pleadings which the indemnified party deems
necessary or appropriate to protect its interests or those of the indemnifying
party and not prejudicial to the indemnifying party (it being understood and
agreed that if an indemnified party knowingly or wilfully takes any such action
that is prejudicial and conclusively causes a final adjudication adverse to the
indemnifying party, the indemnifying party will be relieved of its obligations
under this Agreement with respect to such third-party claim). If requested by
the indemnifying party, the indemnified party agrees, at the sole cost and
expense of the indemnifying party, to cooperate with the indemnifying party and
its counsel in contesting any third-party claim that the indemnifying party
elects to contest, including the making of any related counterclaim against the
Person asserting the third-party claim or any cross complaint against any
Person. The indemnified party may participate in, but not control, any defense
or settlement of any third-party claim controlled by the indemnifying party
pursuant to this Section 14.5, and will bear its own costs and expenses with
respect to any such participation.

                  (c) If an indemnifying party fails to notify an indemnified
party within the Election Period that the indemnifying party elects to defend
the indemnified party pursuant to Section 14.5(b), or if the indemnifying party
elects to defend the indemnified party pursuant to Section 14.5(b) but fails
diligently and promptly to prosecute or settle the third-party claim, then the
indemnified party will have the right to defend, at the sole cost and

                                       35
<PAGE>   36

expense of the indemnifying party, the third-party claim by all appropriate
proceedings, which proceedings will be promptly and vigorously prosecuted by the
indemnified party to a final conclusion or settled. The indemnified party will
have full control of such defense and proceedings, provided that without the
indemnifying party's consent, which will not be unreasonably withheld, the
indemnified party may not enter into any compromise or settlement of such
third-party claim; and provided that if requested by the indemnified party, the
indemnifying party will, at the sole cost and expense of the indemnifying party,
cooperate with the indemnified party and its counsel in contesting an
third-party claim that the indemnified party is contesting, or, if appropriate
and related to the third-party claim in question, in making any counterclaim
against the Person asserting the third-party claim or any cross complaint
against any Person. Notwithstanding the foregoing, if the indemnifying party has
delivered a written notice to the indemnified party to the effect that the
indemnifying party disputes its potential liability to the indemnified party
under this Agreement and if such dispute is resolved in favor of the
indemnifying party by a final, nonappealable order of a court of competent
jurisdiction, the indemnifying party will not be required to bear the costs and
expenses of the indemnified party's defense pursuant to this Section 14.5 or of
the indemnifying party's participation at the indemnified party's request, and
the indemnified party will reimburse the indemnifying party in full for all
costs and expenses of such litigation. The indemnifying party may participate
in, but not control, any defense or settlement controlled by the indemnified
party pursuant to this Section 14.5 and the indemnifying party will bear its own
costs and expenses with respect to any such participation.

         14.6 Limitations of Liability.

                                       36
<PAGE>   37

         In no event shall THEC or KE&P ever be liable to the other for any
consequential, special, loss of profits, punitive or exemplary damages relating
to or arising out of this Agreement.

                                   ARTICLE XV.

                    PREFERENTIAL RIGHT AND CHANGE OF CONTROL

         15.1 Preferential Right. If at anytime KE&P enters into a binding
agreement to sell, exchange or otherwise transfer to a third Person its interest
in all or any portion of the Leases, KE&P shall immediately submit to THEC a
copy of such agreement. On or before thirty (30) days after its receipt of a
copy of such agreement, THEC may elect to acquire such interest from KE&P on the
same terms as contained in such agreement. If THEC elects to acquire such
interest, it shall give KE&P written notice of such election on or before the
expiration of such thirty (30) day period. Thereafter, such transaction shall be
consummated between KE&P and THEC on the terms contained in such agreement
except that the closing thereof shall be no less than sixty (60) days after THEC
provided its written notice to KE&P. If any of the consideration to be received
by KE&P under such agreement is property other than cash, KE&P and THEC shall
endeavor in good faith to determine the fair market value of such other property
and the amount so determined shall be paid in cash to KE&P in lieu of such other
property. If such fair market value cannot be determined by KE&P and THEC, such
fair market value shall be determined as quickly as possible in accordance with
the rules of the American Arbitration Association by three arbitrators, one
appointed by THEC, one appointed by KE&P, and the third by THEC and KE&P or, if
they cannot agree on such third arbitrator, by the Senior Federal Judge for the
Southern District of Texas (Houston Division) on application by either THEC or
KE&P. The

                                       37
<PAGE>   38

decision of the arbitrators shall be binding on both KE&P and THEC and the
expenses of such arbitrator shall be shared equally by KE&P and THEC.

         15.2 Change of Control. During the terms of this Agreement, if any
Person or two or more Persons acting as a group acquire beneficial ownership of
more than thirty five percent (35%) of the outstanding common stock of
MarketSpan Corporation d/b/a KeySpan Energy ("KeySpan Energy"), measured by
voting power, or if a simple majority of the directors of KeySpan Energy shall
consist of Persons not nominated by KeySpan Energy's Board of Directors
(collectively, a "Change of Control"), KE&P shall promptly give THEC written
notice of such Change of Control. On or before ninety (90) days after its
receipt of such notice, THEC may elect to acquire KE&P's entire interest in the
Leases. If THEC elects to acquire such interest, it shall give KE&P written
notice of such election on or before the expiration of such ninety (90) day
period. Thereafter, THEC and KE&P shall submit to Netherland Sewell & Assoc.
Incorporated, independent petroleum reservoir engineers (the "Engineer") all
information in their possession reasonably related to the determination of the
fair market value of KE&P's interest in the Leases. Within sixty (60) days after
its receipt of such information, the Engineer shall determine the fair market
value of such interest based on such factors, circumstances, conditions and
opinions as it deems in its sole discretion to be relevant in the determination
of such value. The Engineer shall provide to THEC and KE&P its opinion of such
fair market value, the proven reserves attributable to such interest and the
value per Mcfe for such reserves ("KE&P's per Mcfe Value") calculated by
dividing such fair market value by such proven reserves. Within sixty (60) days
after such determination, as long as the KE&P's per Mcfe Value is not materially
different from the per Mcfe value of THEC's proved reserves (computed by
dividing the total enterprise value/market capitalization [debt plus equity
market value] of THEC by the

                                       38
<PAGE>   39

amount of THEC's total proved reserves as determined by the Engineer), THEC
shall purchase from KE&P such interest at its fair market value as determined by
the Engineer for cash and on such other terms as are customary in purchase and
sales agreements relating to oil and gas producing properties. For purposes of
the foregoing, a material difference shall exist if KE&P's per Mcfe Value is
less than seventy seven and one half percent (77.5%) of THEC's per Mcfe Value
calculated as described above. In the event there is a material difference, the
fair market value of KE&P's interest in the Leases shall be determined as
quickly as possible by three arbitrators pursuant to the procedures set forth in
Section 15.1 and THEC shall purchase from KE&P such interest at its fair market
value as determined by such arbitrators for cash and on such terms as are
customary in purchase and sales agreements relating to oil and gas producing
properties.

                                   ARTICLE XVI.

                                  MISCELLANEOUS

         16.1 Amendments, Waivers and Consents. Neither this Agreement nor any
term or provision of this Agreement may be changed, amended, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, amendment, waiver, discharge or
termination is sought. Neither any course of dealing on the part of either party
to this Agreement or their respective officers or employees, nor any failure or
delay on the part of either party, or their respective officers or employees, in
exercising any right, power or privilege under this Agreement shall operate as a
waiver of any such right, power or privilege, and any single or partial exercise
of any right, power or privilege shall not preclude any later exercise thereof
or any exercise of any other right, power or privilege under this Agreement.

                                       39
<PAGE>   40

         16.2 Notices. Ail notices, requests, demands, consents and other
communications under this Agreement, except as otherwise provided, shall be by
telecopy or by registered mail and shall be deemed to have been duly given:

                  (a) If to THEC, at 1100 Louisiana, Suite 2000, Houston, Texas
77002, Attention: James G. Floyd, President and CEO, or at such other latest
address as THEC may have furnished to KE&P in writing; or

                  (b) If to KE&P, at One Metro Tech Center, 18th Floor,
Brooklyn, New York 11201, Attention: Neil Nichols, President, or to such other
latest address as KE&P may have furnished to THEC in writing.

         16.3 Entire Agreement. This Agreement and the Schedules attached
hereto, which are incorporated herein for all purposes, embody all agreements
and understandings between THEC and KE&P and supersede all prior agreements and
understandings relating to the subject matter of this Agreement including, but
not limited to, the Original Exploration Agreement and the First Amendment. In
the event of any conflict between the terms of any Operating Agreement between
THEC and KE&P and this Agreement, this Agreement shall control.

         16.4 LAW GOVERNING. THIS AGREEMENT, TO THE EXTENT PERMITTED BY LAW,
SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS.

         16.5 Headings. The headings in this Agreement are for purposes of
reference only, and shall not limit, enlarge or otherwise affect any of the
terms or provisions of this Agreement.

                                       40
<PAGE>   41

         16.6 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

         16.7 Assignment. All the terms and provisions of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties to
this Agreement and their respective successors and assigns; provided that,
during the terms of this Agreement, neither party may assign or transfer its
rights, benefits or obligations under this Agreement or its Working Interests in
the Leases without the prior written consent of the other party other than to an
affiliate or as specified in 15.1 and 15.2.

         16.8 Third Party Beneficiary. There is no third party beneficiary to
this Agreement and the terms and provisions of this Agreement shall not impart
rights enforceable by any Person not a party or not a successor or assign of a
party to this Agreement

         16.9 Joint Preparation. This Agreement was prepared jointly by the
parties hereto, and not by either party to the exclusion of the other.

         IN WITNESS WHEREOF, this instrument is executed effective as of January
1, 1999 although actually executed on the date hereinbefore first written.

                                       THE HOUSTON EXPLORATION COMPANY

                                       By: /s/ James G. Floyd
                                           -------------------------------------
                                               James G. Floyd, President and CEO

                                       KEYSPAN EXPLORATION AND
                                        PRODUCTION, L.L.C.

                                       By: /s/ Zain Mirza
                                           -------------------------------------
                                              Zain Mirza, Vice President

                                       41<PAGE>   1
                                                                    EXHIBIT 4.16

                         WEATHERFORD INTERNATIONAL, INC.

                         1998 EMPLOYEE STOCK OPTION PLAN

<PAGE>   2

                         WEATHERFORD INTERNATIONAL, INC.

                         1998 EMPLOYEE STOCK OPTION PLAN

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            Section
                                                                                                            -------
<S>                                                                                                         <C>
ARTICLE I - PLAN

         Purpose................................................................................................1.1
         Effective Date of Plan.................................................................................1.2

ARTICLE II - DEFINITIONS

         Affiliate..............................................................................................2.1
         Board of Directors.....................................................................................2.2
         Code...................................................................................................2.3
         Committee..............................................................................................2.4
         Company................................................................................................2.5
         Employee...............................................................................................2.6
         Executive Officer......................................................................................2.7
         Fair Market Value......................................................................................2.8
         Nonqualified Option....................................................................................2.9
         Option................................................................................................2.10
         Option Agreement......................................................................................2.11
         Plan..................................................................................................2.12
         Stock.................................................................................................2.13

ARTICLE III - ELIGIBILITY

ARTICLE IV - GENERAL PROVISIONS RELATING TO OPTIONS

         Authority to Grant Options ............................................................................4.1
         Dedicated Shares.......................................................................................4.2
         Non-Transferability....................................................................................4.3
         Requirements of Law....................................................................................4.4
         Changes in the Company's Capital Structure.............................................................4.5

ARTICLE V - OPTIONS

         Type of Option.........................................................................................5.1
         Option Price...........................................................................................5.2
         Duration of Options....................................................................................5.3
         Amount Exercisable.....................................................................................5.4
</TABLE>

                                       -i-

<PAGE>   3

<TABLE>
<S>                                                                                                            <C>
         Exercise of Options....................................................................................5.5
         Exercise Following Termination of Employment...........................................................5.6
         Substitution Options...................................................................................5.7
         No Rights as Stockholder...............................................................................5.8

ARTICLE VI - ADMINISTRATION

ARTICLE VII - AMENDMENT OR TERMINATION OF PLAN

ARTICLE VIII - MISCELLANEOUS

         No Establishment of a Trust Fund.......................................................................8.1
         No Employment Obligation...............................................................................8.2
         Tax Withholding........................................................................................8.3
         Written Agreement......................................................................................8.4
         Indemnification of the Committee and the Board of Directors............................................8.5
         Gender.................................................................................................8.6
         Headings...............................................................................................8.7
         Other Compensation Plans...............................................................................8.8
         Other Options or.......................................................................................8.9
         Governing Law.........................................................................................8.10
</TABLE>

                                      -ii-

<PAGE>   4

                                   ARTICLE I.

                                      PLAN

     1.1 PURPOSE. This Plan is a plan for certain employees of the Company and
its Affiliates and is intended to advance the best interests of the Company, its
Affiliates, and its stockholders by providing those persons who have substantial
responsibility for the management and growth of the Company and its Affiliates
with additional incentives and an opportunity to obtain or increase their
proprietary interest in the Company, thereby encouraging them to continue in the
employ of the Company or any of its Affiliates.

     1.2 EFFECTIVE DATE OF PLAN. This Plan is effective September 8, 1998.

                                   ARTICLE II.

                                   DEFINITIONS

     The words and phrases defined in this Article shall have the meaning set
out in these definitions throughout this Plan, unless the context in which any
such word or phrase appears reasonably requires a broader, narrower, or
different meaning.

     2.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of the action or transaction, each of the corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain. The term
"subsidiary corporation" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of the
action or transaction, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in the
chain.

     2.2 "BOARD OF DIRECTORS" means the board of directors of the Company.

     2.3 "CODE" means the Internal Revenue Code of 1986, as amended.

     2.4 "COMMITTEE" means the Compensation Committee of the Board of Directors
or such other committee designated by the Board of Directors.

     2.5 "COMPANY" means Weatherford International, Inc.

     2.6 "EMPLOYEE" means a person employed by the Company or any Affiliate to
whom an Option is granted.

                                      -1-

<PAGE>   5

     2.7 "EXECUTIVE OFFICER" means a "officer" of the Company as defined in Rule
16a-1 under the Securities Exchange Act of 1934.

     2.8 "FAIR MARKET VALUE" of the Stock as of any date means (a) the closing
sales price of the Stock on that date on the principal securities exchange on
which the Stock is listed; or (b) if the Stock is not listed on a securities
exchange, the closing sales price of the Stock on that date as reported on the
New York Stock Exchange; or (c) if the Stock is not listed on the New York Stock
Exchange, the average of the high and low bid quotations for the Stock on that
date as reported by the National Quotation Bureau Incorporated; or (d) if none
of the foregoing is applicable, an amount at the election of the Committee equal
to the (x) the average between the closing bid and ask prices per Share of Stock
on the last preceding date on which those prices were reported or (y) that
amount as determined by the Committee in its sole discretion.

     2.9 "NONQUALIFIED OPTION" means an option granted under this Plan which is
not intended to satisfy the requirements of Section 422 of the Code.

     2.10 "OPTION" means a Nonqualified Option granted under this Plan to
purchase shares of Stock.

     2.11 "OPTION AGREEMENT" means the written agreement which sets out the
terms of an Option.

     2.12 "PLAN" means the Weatherford International, Inc. 1998 Employee Stock
Option Plan, as set out in this document and as it may be amended from time to
time.

     2.13 "STOCK" means the common stock of the Company, $1.00 par value (or
such other par value as may be designated by act of the Company's stockholders)
or, in the event that the outstanding shares of common stock are later changed
into or exchanged for a different class of stock or securities of the Company or
another corporation, that other stock or security.

                                  ARTICLE III.

                                  ELIGIBILITY

     The individuals who shall be eligible to receive Nonqualified Options shall
be all employees of the Company or any of its Affiliates. Grants will be made to
such of those employees who are eligible to participate as the Committee shall
determine from time to time. The Committee may designate one or more individuals
who shall be eligible to receive any Option under this Plan or under other
similar plans of the Company.

                                      -2-

<PAGE>   6

                                   ARTICLE IV.

                     GENERAL PROVISIONS RELATING TO OPTIONS

     4.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant to those employees
of the Company or any of its Affiliates, as it shall from time to time
determine, Options under the terms and conditions of this Plan. Subject only to
any applicable limitations set out in this Plan, the number of shares of Stock
to be covered by any Option to be granted to an employee of the Company or any
of its Affiliates shall be as determined by the Committee.

     4.2 DEDICATED SHARES. The total number of shares of Stock with respect to
which Options may be granted under the Plan shall be 15,000,000 shares. The
shares of Stock that may be issued to employees who are not Executive Officers
may be either treasury shares or authorized but unissued shares. The shares of
Stock that may be issued to Executive Officers may be treasury shares or, if
necessary to permit the issuance of shares upon the exercise of an Option to an
Executive Officer, subject to the receipt of all necessary approvals by the
stockholders of the Company, authorized but unissued shares. The number of
shares stated in this Section 4.2 shall be subject to adjustment in accordance
with the provisions of Section 4.5.

     In the event that any outstanding Option shall expire or terminate for any
reason or any Option is surrendered, the shares of Stock allocable to the
unexercised portion of that Option may again be subject to an Option under the
Plan.

     4.3 NON-TRANSFERABILITY. Options shall not be transferable by the Employee
otherwise than by will or under the laws of descent and distribution or pursuant
to a domestic relations order, and shall be exercisable, during the Employee's
lifetime, only by the Employee.

     4.4 REQUIREMENTS OF LAW.

     (a) In the event the shares issuable on exercise of an Option are not
registered under the Securities Act of 1933, the Company may imprint on the
certificate for such shares the following legend or any other legend which
counsel for the Company considers necessary or advisable to comply with the
Securities Act of 1933:

          "The shares of stock represented by this certificate have not been
          registered under the Securities Act of 1933 or under the securities
          laws of any state and may not be sold or transferred except upon such
          registration or upon receipt by the Corporation of an opinion of
          counsel satisfactory to the Corporation, in form and substance
          satisfactory to the Corporation, that registration is not required for
          such sale or transfer."

The Company may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) and, in the event any shares are so registered, the Company
may remove any legend on certificates representing such shares. The Company
shall not be obligated to take any other affirmative action in order to cause

                                      -3-

<PAGE>   7

the exercise of an Option or the issuance of shares pursuant thereto to comply
with any law or regulation of any governmental authority.

     (b) The Company shall (i) reserve a number of authorized but unissued
shares of Stock sufficient to satisfy its obligations hereunder and (ii) shall
reserve or acquire such number of treasury shares of Stock as may be necessary
from time to time to allow any vested Options that are required to be satisfied
with treasury shares to be exercised.

     4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.

     If the Company shall effect a subdivision or consolidation of shares or
other capital adjustment of, or the payment of a dividend in capital stock or
other equity securities of the Company on, its Common Stock, or other increase
or reduction of the number of shares of the Common Stock without receiving
consideration therefor in money, services, or property, or the reclassification
of its Common Stock, in whole or in part, into other equity securities of the
Company, then (a) the number, class and per share price of shares of stock
subject to outstanding Options hereunder shall be appropriately adjusted (or in
the case of the issuance of other equity securities as a dividend on, or in a
reclassification of, the Common Stock, the Options shall extend to such other
securities) in such a manner as to entitle an optionee to receive, upon exercise
of an Option, for the same aggregate cash consideration, the same total number
and class or classes of shares (or in the case of a dividend of, or
reclassification into, other equity securities, such other securities) he would
have held after such adjustment if he had exercised his Option in full
immediately prior to the event requiring the adjustment, or, if applicable, the
record date for determining stockholders to be affected by such adjustment; and
(b) the number and class of shares then reserved for issuance under the Plan (or
in the case of a dividend of, or reclassification into, other equity securities,
such other securities) shall be adjusted by substituting for the total number
and class of shares of stock then received, the number and class or classes of
shares of stock (or in the case of a dividend of, or reclassification into,
other equity securities, such other securities) that would have been received by
the owner of an equal number of outstanding shares of Common Stock as a result
of the event requiring the adjustment. Comparable rights shall accrue to each
optionee in the event of successive subdivisions, consolidations, capital
adjustments, dividends or reclassifications of the character described above.

     If the Company shall distribute to all holders of its shares of Common
Stock (including any such distribution made to non-dissenting stockholders in
connection with a consolidation or merger in which the Company is the surviving
corporation and in which holders of shares of Common Stock continue to hold
shares of Common Stock after such merger or consolidation) evidences of
indebtedness or cash or other assets (other than cash dividends payable out of
consolidated retained earnings not in excess of, in any one year period, the
greater of (a) in an amount per share of Common Stock equal to $1.00 per share
of Common Stock (as the same may be adjusted from time

                                      -4-

<PAGE>   8

to time by the Board of Directors to reflect the effect of changes in
capitalization) and (b) two times the aggregate amount of dividends per share
paid during the preceding calendar year and dividends or distributions payable
in shares of Common Stock or other equity securities of the Company described in
the immediately preceding paragraph, but including stock or other securities of
any corporation or other entity owned by the Company), then in each case the
Option Price shall be adjusted by reducing the Option Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by the fair market value, as determined in
good faith by the Board of Directors of the Company (whose determination shall
be described in a statement filed in the Company's corporate records and be
available for inspection by any holder of an Option) of the portion of the
evidence of indebtedness or cash or other assets so to be distributed applicable
to one share of Common Stock; provided that in no event shall the Option Price
be less than the par value of a share of Common Stock. In the event such
adjustment would result in the Option Price being less than the par value of a
share of Common Stock but for the foregoing proviso, the terms of the Option
shall be appropriately adjusted so as to maintain the economic value of the
Option, including through an adjustment to the number of shares of Common Stock
subject to the Option and through a provision allowing the holder of the Option
to receive the evidence of indebtedness or cash or other assets so to be
distributed applicable to one share of Common Stock for each share of Common
Stock that may be purchased on the exercise of the Option. Such adjustment shall
be made whenever any such distribution is made, and shall become effective on
the date of the distribution retroactive to the record date for the
determination of the stockholders entitled to receive such distribution. In
addition, in the event the Company distributes shares or other securities of a
subsidiary corporation or other entity to the holders of the Common Stock, the
Board of Directors may, in lieu of the adjustment provided above, either (i)make
provision allowing the holder of the Option to receive the shares or securities
of the corporation or entity that are subject to the distribution in addition to
the shares of the Common Stock subject to the Option or (ii) adjust the exercise
price and number of shares subject to the Option in a manner deemed appropriate
to maintain the economic value of the Option. In the case of an adjustment
pursuant to clause (i), separate option agreements covering each security may be
used, with the Option Price to be allocated between the securities. Comparable
adjustments shall be made in the event of successive distributions of the
character described above.

     If the Company shall make a tender offer for, or grant to all of its
holders of its shares of Common Stock the right to require the Company or any
subsidiary of the Company to acquire from such stockholders shares of, Common
Stock, at a price in excess of the Fair Market Value (a "Put Right") or the
Company shall grant to all of its holders of its shares of Common Stock the
right to acquire shares of Common Stock for less than the Fair Market Value (a
"Purchase Right") then, in the case of a Put Right, the Option Price shall be
adjusted by multiplying the Option Price in effect immediately prior to the
record date for the determination of stockholders entitled to receive such Put
Right by a fraction, the numerator of which shall be the number of shares of
Common Stock then outstanding minus the number of shares of Common Stock which
could be purchased at the Fair Market Value for the aggregate amount which would
be paid if all Put Rights are exercised and the denominator of which is the
number of shares of Common Stock which would be outstanding if all Put Rights
are exercised; and, in the case of a Purchase Right, the Option Price shall be
adjusted by multiplying the Option Price in effect immediately prior to the
record date for the determination of the stockholders entitled to receive such
Purchase Right by a fraction, the numerator of which shall be the number of
shares of Common Stock then outstanding plus the number of shares of Common

                                      -5-

<PAGE>   9

Stock which could be purchased at the Fair Market Value for the aggregate amount
which would be paid if all Purchase Rights are exercised and the denominator of
which is the number of shares of Common Stock which would be outstanding if all
Purchase Rights are exercised. In addition, the number of shares subject to the
Option shall be increased by multiplying the number of shares then subject to
the Option by a fraction which is the inverse of the fraction used to adjust the
Option Price. Notwithstanding the foregoing, if any such Put Rights or Purchase
Rights shall terminate without being exercised, the Option Price and number of
shares subject to the Option shall be appropriately readjusted to reflect the
Option Price and number of shares subject to the Option which would have been in
effect if such unexercised Rights had never existed. Comparable adjustments
shall be made in the event of successive transactions of the character described
above.

     If there is a merger of one or more corporations or entities with or into
the Company in which the Company is not the sole survivor or there is an
exchange, conversion or modification to the ownership of the then outstanding
shares of Common Stock of the Company, a consolidation of the Company and any
one or more corporations or entities, a statutory share or interest exchange in
which all of the Common Stock is acquired or any other similar business
combination with respect to the Company in which the Common Stock is acquired by
a third party, each optionee, at no additional cost, shall be entitled to
receive, upon any exercise of his Option, in lieu of the number of shares as to
which the Option shall then represent the right to purchase, the number and
class of shares of stock or other securities, assets or other property,
including cash, to which the optionee would have been entitled to receive or
continue to hold pursuant to the terms of the agreement of merger,
consolidation, share or interest exchange or other similar transaction if at the
time of such merger, consolidation, share or interest exchange such optionee had
been a holder of a number of shares of Common Stock equal to the number of
shares as to which the Option shall then represent the right to purchase.
Comparable rights shall accrue to each optionee in the event of successive
mergers, consolidations, share or interest exchanges or other transactions of
the character described above.

     If a corporate transaction described in Section 424(a) of the Code which
involves the Company is to take place and there is to be no surviving
corporation or entity while an Option remains in whole or in part unexercised,
it may be cancelled by the Board of Directors as of the effective date of any
such corporate transaction but before the date each optionee shall be provided
with a notice of such cancellation and each optionee shall have the right to
exercise such Option in full (without regard to any limitations on exercise set
forth in or imposed by the option agreement pursuant to which such Option was
granted as contemplated by Paragraph 9 of the Plan) to the extent it is then
still unexercised during a 30-day period preceding the effective date of such
corporate transaction.

     In the event (i) the Company were to distribute to its stockholders or
otherwise divest of a majority of the stock of a subsidiary corporation that is
the principal employer of the Employee and (ii) following such distribution or
divestment the stock of the subsidiary corporation or any parent corporation of
such subsidiary corporation is listed or authorized for listing on a national
securities exchange or authorized for quotation on the NASDAQ national market
(or successor market), the Board of Directors may, but shall not be required to,
adjust the terms of the Option to provide that such Option shall only represent
a right to purchase shares in such subsidiary corporation or parent corporation
and the number of shares and exercise price will be appropriately adjusted so as
to

                                      -6-

<PAGE>   10

maintain the economic value of the Option. This adjustment would be in lieu of
any adjustment that might otherwise be required under this Section 4.5 for that
transaction.

     Except as hereinbefore expressly provided, the issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Options.

                                   ARTICLE V.

                                    OPTIONS

     5.1 TYPE OF OPTION. All Options granted under this Plan shall constitute
Nonqualified Options.

     5.2 OPTION PRICE. The price at which shares of Stock may be purchased under
a Nonqualified Option shall not be less than the aggregate par value of the
shares of Stock on the date the Option is granted. The Committee in its
discretion may provide that the price at which shares of Stock may be purchased
under a Nonqualified Option may be more or less than 100% of Fair Market Value
on the date of grant.

     5.3 DURATION OF OPTIONS. Unless otherwise provided in an Option Agreement,
no Option shall be exercisable after one day less than 10 years from the date
the Option becomes first exercisable.

     5.4 AMOUNT EXERCISABLE. Each Option may be exercised by an Employee from
time to time, in whole or in part, after three years from the date of grant, in
the manner and subject to the conditions the Committee, in its sole discretion,
may provide in the Option Agreement, as long as the Option is valid and
outstanding under the terms of this Plan. Unless otherwise provided in an Option
Agreement, (a) in the case of death or disability within three years of the date
of grant, while the optionee is an Employee, each Option shall become
immediately exercisable as described in Section 5.6, and (b) in the case of
retirement by an Employee within three years of the date of grant, each Option
shall become exercisable as described in Section 5.6.

     5.5 EXERCISE OF OPTIONS. An optionee may exercise such optionee's Option by
delivering to the Company a written notice stating (i) that such optionee wishes
to exercise such Option on the date such notice is so delivered, (ii) the number
of shares of stock with respect to which such Option is to be exercised, (iii)
the address to which the certificate representing such shares of stock should be
mailed, and (iv) the social security number of such optionee. In order to be
effective, such written notice shall be accompanied by (i) payment of the Option
price of such shares of stock and (ii) payment of an amount of money necessary
to satisfy any withholding tax liability that may result from the exercise of
such Option. Each such payment shall be made by cashier's check drawn on a
national banking association and payable to the order of the Company in United
States dollars.

                                      -7-

<PAGE>   11

     Unless otherwise provided in an Option Agreement, if, at the time of
receipt by the Company of such written notice, (i) the Company has unrestricted
surplus in an amount not less than the Option price of such shares of stock,
(ii) all accrued cumulative preferential dividends and other current
preferential dividends on all outstanding shares of preferred stock of the
Company have been fully paid, (iii) the acquisition by the Company of its own
shares of stock for the purpose of enabling such optionee to exercise such
Option is otherwise permitted by applicable law and without any vote or consent
of any stockholder of the Company, and (iv) there shall have been adopted, and
there shall be in full force and effect, a resolution of the Board of Directors
of the Company authorizing the acquisition by the Company of its own shares of
stock for such purpose, then such optionee may deliver to the Company, in
payment of the Option price of the shares of stock with respect to which such
Option is exercised, (x) certificates registered in the name of such optionee
that represent a number of shares of stock legally and beneficially owned by
such optionee (free of all liens, claims and encumbrances of every kind) and
having a fair market value on the date of receipt by the Company of such written
notice that is not greater than the Option price of the shares of stock with
respect to which such Option is to be exercised, such certificates to be
accompanied by stock powers duly endorsed in blank by the record holder of the
shares of stock represented by such certificates, with the signature of such
record holder guaranteed by a national banking association (or in lieu of such
certificates, other arrangements for the transfer of such shares to the Company
which are satisfactory to the Company), and (y) if the Option price of the
shares of stock with respect to which such Option is to be exercised exceeds
such fair market value, a cashier's check drawn on a national banking
association and payable to the order of the Company in an amount, in United
States dollars, equal to the amount of such excess plus the amount of money
necessary to satisfy any withholding tax liability that may result from the
exercise of such Option. Notwithstanding the provisions of the immediately
preceding sentence, the Committee, in its sole discretion, may refuse to accept
shares of stock in payment of the Option price of the shares of stock with
respect to which such Option is to be exercised and, in that event, any
certificates representing shares of stock that were received by the Company with
such written notice shall be returned to such optionee, together with notice by
the Company to such optionee of the refusal of the Committee to accept such
shares of stock. Unless otherwise provided in the Option Agreement, the Company,
upon approval of the Committee and in its sole discretion, upon the request of
the optionee, may retain shares of Common Stock which would otherwise be issued
upon exercise of an Option to satisfy any withholding tax liability that may
result from the exercise of such Option, which shares shall be valued for such
purpose at their then Fair Market Value. If, at the expiration of seven business
days after the delivery to such optionee of such written notice from the
Company, such optionee shall not have delivered to the Company a cashier's check
drawn on a national banking association and payable to the order of the Company
in an amount, in United States dollars, equal to the Option Price of the shares
of stock with respect to which such Option is to be exercised, such written
notice from the optionee to the Company shall be ineffective to exercise such
Option.

     As promptly as practicable after the receipt by the Company of (i) such
written notice from the optionee, (ii) payment, in the form required by the
foregoing provisions of this Paragraph 5.5, of the Option Price of the shares of
stock with respect to which such Option is to be exercised, and (iii) payment,
in the form required by the foregoing provisions of this Section, of an amount
of money necessary to satisfy any withholding tax liability that may result from
the exercise of such Option, a certificate representing the number of shares of
stock with respect to which such Option

                                      -8-

<PAGE>   12

has been so exercised, reduced, to the extent applicable by the number of shares
retained by the Company as provided above to pay any required withholding tax,
such certificate to be registered in the name of such optionee, provided that
such delivery shall be considered to have been made when such certificate shall
have been mailed, postage prepaid, to such optionee at the address specified for
such purpose in such written notice from the optionee to the Company.

     5.6 EXERCISE FOLLOWING TERMINATION OF EMPLOYMENT. Unless it is expressly
provided otherwise in the Option Agreement or other written agreement with the
Employee that provides otherwise, Options shall terminate as follows:

         SEVERANCE OF EMPLOYMENT. If the Employee severs employment from the
Company and all Affiliates prior to three years from the date such Options were
granted, for any reason, with or without cause, other than for death, retirement
under the then established rules of the Company, or severance for disability,
all such Options shall terminate and be immediately forfeited, and not be
exercisable. If the Employee severs employment from the Company and all
Affiliates for any reason, with or without cause, other than for death,
retirement under the then established rules of the Company, or severance for
disability on or after three years from the date such Options were granted, the
Options shall continue in effect until the date such Options are otherwise due
to expire in accordance with Section 5.3, unless it is expressly provided
otherwise in the Option Agreement or other written agreement with the Employee
that provides otherwise. Whether authorized leave of absence or absence on
military or government service shall constitute severance of the employment of
the Employee shall be determined by the Committee at that time.

         In determining the employment relationship between the Company and the
Employee, employment by any Affiliate shall be considered employment by the
Company, as shall employment by a corporation issuing or assuming a stock option
in a transaction to which Section 424(a) of the Code applies, or by a parent
corporation or subsidiary corporation of the corporation issuing or assuming a
stock option (and for this purpose, the phrase "corporation issuing or assuming
a stock option" shall be substituted for the word "Company" in the definitions
of parent corporation and subsidiary corporation in Section 2.1, and the
parent-subsidiary relationship shall be determined at the time of the corporate
action described in Section 424(a) of the Code).

         DEATH. If the Employee dies prior to three years from the date such
Options were granted, the Options shall continue in effect until 10 years
following the date of the Employee's death, unless it is expressly provided
otherwise in the Option Agreement. If the Employee dies on or after three years
from the date such Options were granted, the Option shall continue in effect
until the date the Option is otherwise due to expire in accordance with Section
5.3, unless it is expressly provided otherwise in the Option Agreement. After
the death of the Employee, the Employee's executors, administrators or any
persons to whom his Option may be transferred by will or by the laws of descent
and distribution shall have the right, at any time prior to the Option's
expiration to exercise it.

         RETIREMENT. If the Employee shall be retired in good standing from the
employ of the Company under the then established rules of the Company, prior to
three years from the date such Options were granted, the Employee shall vest in
the number of Options determined by multiplying the number of Options granted to
the Employee by a fraction, the numerator of which is the

                                      -9-

<PAGE>   13

Employee's total whole years of service since the Options were granted and the
denominator of which is three. With respect to these vested Options, the Options
shall be exercisable until 10 years following the date of the Employee's
retirement in accordance with this Section 5.6, unless it is expressly provided
otherwise in the Option Agreement. If the Employee shall be retired in good
standing from the employ of the Company under the then established rules of the
Company on or after three years from the date such Options were granted, such
Options shall continue until the date the Options are otherwise due to expire in
accordance with Section 5.3, unless it is expressly provided otherwise in the
Option Agreement.

         DISABILITY. If the Employee shall be severed from the employ of the
Company for disability prior to three years from the date such Options were
granted, the Options shall be immediately exercisable and continue in effect
until 10 years following the date he severed from the employ of the Company for
disability, unless it is expressly provided otherwise in the Option Agreement.
If the Employee shall be severed from the employ of the Company for disability
on or after three years from the date such Options were granted, the Options
shall continue in effect until the date the Options are otherwise due to expire
in accordance with Section 5.3, unless it is expressly provided otherwise in the
Option Agreement.

         5.7 SUBSTITUTION OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of the Company, or whose employer
is about to become a parent or subsidiary corporation of the Company,
conditioned upon the employee becoming an employee of the Company or a parent or
subsidiary corporation of the Company, as a result of the merger or
consolidation of the Company with another corporation, or the acquisition by the
Company of substantially all the assets of another corporation, or the
acquisition by the Company of at least 50% of the issued and outstanding stock
of another corporation as the result of which it becomes a subsidiary of the
Company. The terms and conditions of the substitute Options so granted may vary
from the terms and conditions set forth in this Plan to such extent as the Board
of Directors of the Company at the time of grant may deem appropriate to
conform, in whole or in part, to the provisions of the stock options in
substitution for which they are granted.

         5.8 NO RIGHTS AS STOCKHOLDER. No Employee shall have any rights as a
stockholder with respect to Stock covered by his Option until the date a stock
certificate is issued for the Stock.

                                   ARTICLE VI.

                                 ADMINISTRATION

         This Plan shall be administered by the Committee. All questions of
interpretation and application of this Plan and Options shall be subject to the
determination of the Committee. A majority of the members of the Committee shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members shall be as effective as if it had been made
by a majority vote at a meeting properly called and held. In carrying out its
authority under this Plan, subject to the express terms of any outstanding
Option or other agreement with an Employee, the

                                      -10-

<PAGE>   14

Committee shall have full and final authority and discretion, including but not
limited to the following rights, powers and authorities, to:

               1. determine the Employees to whom and the time or times at which
          Options will be made,

               2. determine the number of shares and the purchase price of Stock
          covered in each Option, subject to the terms of this Plan,

               3. determine the terms, provisions and conditions of each Option,
          which need not be identical,

               4. accelerate the time at which any outstanding Option may be
          exercise,

               5. define the effect, if any, on an Option of the death,
          disability, retirement, or termination of employment of the Employee,

               6. prescribe, amend and rescind rules and regulations relating to
          administration of this Plan, and

               7. make all other determinations and take all other actions
          deemed necessary, appropriate, or advisable for the proper
          administration of this Plan.

The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive and
binding on all parties.

                                  ARTICLE VII.

                        AMENDMENT OR TERMINATION OF PLAN

     The Board of Directors of the Company may amend, terminate or suspend this
Plan at any time, in its sole and absolute discretion subject to the rights of
holders of outstanding Options at the time of such amendment, termination or
suspension.

                                      -11-

<PAGE>   15

                                  ARTICLE VIII.

                                  MISCELLANEOUS

     8.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set aside nor
shall a trust fund of any kind be established to secure the rights of any
Employee under this Plan. All Employees shall at all times rely solely upon the
general credit of the Company for the payment of any benefit which becomes
payable under this Plan.

     8.2 NO EMPLOYMENT OBLIGATION. The granting of any Option shall not
constitute an employment contract, express or implied, nor impose upon the
Company or any Affiliate any obligation to employ or continue to employ any
Employee. The right of the Company or any Affiliate to terminate the employment
of any person shall not be diminished or affected by reason of the fact that an
Option has been granted to him.

     The decision of the Committee as to the cause of the Employee's discharge,
the damage done to the Company or an Affiliate, and the extent of the Employee's
competitive activity shall be final. No decision of the Committee, however,
shall affect the finality of the discharge of the Employee by the Company or an
Affiliate in any manner.

     8.3 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to
deduct from other compensation payable to each Employee any sums required by
federal, state, or local tax law to be withheld with respect to the grant or
exercise of an Option. In the alternative, the Company may require the Employee
(or other person exercising the Option) to pay the sum directly to the employer
corporation. If the Employee (or other person exercising the Option) is required
to pay the sum directly, payment in cash or by check of such sums for taxes
shall be delivered within 10 days after the date of exercise . The Company shall
have no obligation upon exercise of any Option until payment has been received,
unless withholding (or offset against a cash payment) as of or prior to the date
of exercise is sufficient to cover all sums due with respect to that exercise.
The Company and its Affiliates shall not be obligated to advise an Employee of
the existence of the tax or the amount which the employer corporation will be
required to withhold. The Company may also allow for the retention of shares of
Stock issuable upon the exercise of Options to satisfy such withholding.

     8.4 WRITTEN AGREEMENT. Each Option shall be embodied in a written Option
Agreement which shall be subject to the terms and conditions of this Plan and
shall be signed by the Employee and the Company. The Option Agreement may
contain any other provisions that the Committee in its discretion shall deem
advisable.

     8.5 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With
respect to administration of this Plan, the Company shall indemnify each present
and future member of the Committee and the Board of Directors against, and each
member of the Committee and the Board of Directors shall be entitled without
further act on his part to indemnity from the Company for, all expenses
(including attorney's fees, the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation, other
than amounts paid to the Company itself) reasonably incurred by him in
connection with or arising out of any action, suit, or proceeding in which he
may be involved by reason of his being or having been a member of the

                                      -12-

<PAGE>   16

Committee and/or the Board of Directors, whether or not he continues to be a
member of the Committee and/or the Board of Directors at the time of incurring
the expenses--including, without limitation, matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been found to have
been negligent in the performance of his duty as a member of the Committee of
the Board of Directors. However, this indemnity shall not include any expenses
incurred by any member of the Committee and/or the Board of Directors in respect
of matters as to which he shall be finally adjudged in any action, suit or
proceeding to have been guilty of gross negligence or willful misconduct in the
performance of his duty as a member of the Committee or the Board of Directors.
In addition, no right of indemnification under this Plan shall be available to
or enforceable by any member of the Committee and the Board of Directors unless,
within 60 days after institution of any action, suit or proceeding, he shall
have offered the Company, in writing, the opportunity to handle and defend same
at its own expense. This right of indemnification shall inure to the benefit of
the heirs, executors or administrators of each member of the Committee and the
Board of Directors and shall be in addition to all other rights to which a
member of the Committee and the Board of Directors may be entitled as a matter
of law, contract, or otherwise.

         8.6 GENDER. If the context requires, words of one gender when used in
this Plan shall include the others and words used in the singular or plural
shall include the other.

         8.7 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of this Plan and shall
not be used in construing the terms of this Plan.

         8.8 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit plans
or arrangements, including any employment, change of control or severance
agreements, in effect with or for the Company or any Affiliate, nor shall this
Plan preclude the Company from establishing any other forms of incentive or
other compensation for employees of the Company or any Affiliate.

         8.9 OTHER OPTIONS. The grant of an Option shall not confer upon the
Employee the right to receive any future or other Options under this Plan,
whether or not Options may be granted to similarly situated Employees, or the
right to receive future Options upon the same terms or conditions as previously
granted.

         8.10 GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Delaware.

                                      -13-

<PAGE>   17

WEATHERFORD INTERNATIONAL, INC.
1998 EMPLOYEE STOCK OPTION PLAN

                             STOCK OPTION AGREEMENT

     Under the terms and conditions of the Weatherford International, Inc. 1998
Employee Stock Option Plan (the "Plan"), a copy of which is attached hereto and
incorporated in this Agreement by reference, Weatherford International, Inc.
(the "Company") grants to ____________ (the "Optionee") the option to purchase
_______shares of the Company's Common Stock, $1.00 par value, at the price of
$__________ per share, subject to adjustment as provided in the Plan (the
"Option") as follows:

     1. Grant. (a) The Company hereby grants to the Optionee the Option
effective as of ______________ (the "Date of Grant"). The Company and the
Optionee agree that the Option shall be subject to the terms of this Agreement
and the Plan. The Company and Optionee further agree that this Agreement,
together with the Plan and the Employment Agreement with the Optionee dated
_____________ (the "Employment Agreement"), sets forth the complete terms of the
Option as in effect on the date hereof. To the extent the terms of this
Agreement and the Option vary with the terms of the Plan, the terms of this
Agreement and the Option shall prevail and this Agreement shall be deemed an
amendment to the Plan to the extent necessary to permit the grant of the Option.

     (b) Subject to the terms and conditions of this Agreement and the Plan, the
Option provides the Optionee with the option to purchase ___________ shares of
Common Stock at a price of _________ per share (the "Option Price").

     (c) The Option is subject to the terms and provisions of the Plan, which
are hereby incorporated herein by reference. The Option shall also be subject to
the terms of the Employment Agreement; provided that the Optionee agrees that as
of the date of this Agreement there does not exist Good Reason (as defined in
the Employment Agreement) for the Optionee to terminate the Optionee's
employment.

     (d) The Option is considered to be a non-statutory option and is not
intended to be an incentive stock option within the meaning of Section 422(b) of
the Internal Revenue Code of 1986, as amended (the "Code").

     (e) Subject to earlier vesting in the event of a "Change in Control" as
provided in Section 1(f) hereof, or in the event of termination of employment
(i) by the Optionee for Good Reason (as defined in the Employment Agreement),
(ii) by the Company for any reason other than Cause (as defined in the
Employment Agreement) or (iii) due to death, disability or retirement within
three years from the date of the grant of the Option as provided for in Section
6 hereof, the Option shall be exercisable following three years from the date of
grant of the Option. No Option however, shall be exercisable after one day less
than 10 years from the date the option becomes first exercisable.

                                      -1-

<PAGE>   18

     (f) Notwithstanding the provisions of Section 1(e) hereof, the Option shall
be exercisable with respect to all of the shares subject to the Option upon the
occurrence of a Change in Control (as defined herein). For purposes of this
Agreement, a Change in Control shall mean the occurrence of one or more of the
following events: (i) any "person", including a "group", as those terms are used
in Section 13(d)(3) of the Securities Exchange Act of 1934, other than an
affiliate of the Company as of the Date of Grant, becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding voting securities;
(ii) the Company is merged or consolidated with or into another corporation and
immediately after giving effect to the merger or consolidation either (A) less
than 65% of the outstanding voting securities of the surviving or resulting
entity are then beneficially owned in the aggregate by (x) the stockholders of
the Company immediately prior to such merger or consolidation or (y) if a record
date has been set to determine the stockholders of the Company entitled to vote
on such merger or consolidation, the stockholders of the Company as of such
record date, or (B) the Board of Directors, or similar governing body, of the
surviving or resulting entity does not have as a majority of its members the
persons specified in clause (iii)(A) and (B) below; (iii) if at any time the
following do not constitute a majority of the Board of Directors of the Company
(or any successor entity referred to in clause (ii) above): (A) persons who are
directors of the Company on the Date of Grant and (B) persons who, prior to
their election as a director of the Company (or successor entity if applicable),
were nominated, recommended or endorsed by a formal resolution of the Board of
Directors of the Company; (iv) persons who are directors of the Company as of
the beginning of any calendar year cease to constitute a majority of the members
of the Board of Directors at any time during that calendar year; or (v) the
Company transfers all or substantially all of its assets as contemplated by
Delaware corporate law on a consolidated basis to another corporation or entity
which is a less than a 50% owned subsidiary of the Company.

     2. Changes in The Company's Capital Structure. (a) The existence of the
Option shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure of its
business, or any merger or consolidation of the Company, or any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the Common
Stock or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.

     (b) The number of shares of Common Stock subject to the Option, the Option
Price and the securities issuable and other property payable upon exercise of
the Option shall be subject to adjustment as provided in the Plan.

     3. Exercise of Options. The Option may be exercised from time to time as to
the total number of shares that may then be issuable upon the exercise thereof
or any portion thereof in the manner and subject to the limitations provided for
in the Plan and in Section 1 hereof.

     4. Assignment. The Option may not be transferred or assigned in any manner
by the Optionee except by will or the laws of descent and distribution or
pursuant to a qualified

                                       2

<PAGE>   19

domestic order, and shall be exercisable during the Employee's lifetime only by
the Employee or an assignee pursuant to a qualified domestic order.

     5. Requirement of Law. If required at any time by the Committee, the Option
may not be exercised until the Optionee has delivered an investment letter to
the Company. In addition, specifically in connection with the Securities Act of
1933 (as now in effect or hereafter amended), upon exercise of the Option, the
Company shall not be required to issue the underlying shares unless the
Committee has received evidence satisfactory to it to the effect that the
Optionee will not transfer such shares except pursuant to a registration
statement in effect under such Act or unless an opinion of counsel satisfactory
to the Committee has been received by the Company to the effect that such
registration is not required. Any determination in this connection by the
Committee shall be final, binding and conclusive. In the event the shares
issuable on exercise of the Option are not registered under the Securities Act
of 1933, the Company may imprint on the certificate for such shares the
following legend or any other legend which counsel for the Company considers
necessary or advisable to comply with Securities Act of 1933:

          The shares of stock represented by this certificate have not been
          registered under the Securities Act of 1933 or under the securities
          laws of any state and may not be sold or transferred except upon such
          registration or upon receipt by the Corporation of an opinion of
          counsel satisfactory to the Corporation, in form and substance
          satisfactory to the Corporation, that registration is not required for
          such sale or transfer.

     The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act of 1933. The Company
shall not be obligated to take any other affirmative action in order to cause
the exercise of the Option or the issuance of shares of Common Stock pursuant
thereto to comply with any law or regulation of any governmental authority.

     6. Termination. The Option, to the extent it shall not previously have been
exercised, shall terminate as follows:

     (a) If the employment of the Optionee with the Company and its Affiliates
is terminated (i) by the Company for any reason other than Cause (as defined in
the Employment Agreement) or (ii) by the Optionee for Good Reason (as defined in
the Employment Agreement), the Option shall continue in effect until one day
less than ten years following the date of the Optionee's date of termination of
employment. If the Optionee elects to terminate the Optionee's employment
relationship with the Company and its Affiliates prior to three years for any
reason other than Good Reason, death, retirement under the then established
rules of the Company or disability, such Options shall terminate and be
immediately forfeited and not be exercisable. In addition, if the employment of
the Optionee is terminated by the Company for Cause prior to three years from
the date such Options were granted, all such Options shall terminate and be
immediately forfeited and not be exercisable.

     (b) DEATH. If the Optionee dies prior to three years from the date such
Options were granted, the Options shall continue in effect until one day less
than 10 years following the date of the Optionee's death. If the Optionee dies
on or after three years from the date such Options were

                                       3

<PAGE>   20

granted, the Option shall continue in effect until one day less than 10 years
after the date the Option became first exercisable. After the death of the
Optionee, the Optionee's executors, administrators or any persons to whom his
Option may be transferred by will or by the laws of descent and distribution
shall have the right, at any time prior to the Option's expiration to exercise
it.

     (c) RETIREMENT. If the Optionee shall be retired in good standing from the
employ of the Company under the then established rules of the Company, prior to
three years from the date such Options were granted, the Optionee shall vest in
the number of Options determined by multiplying the number of Options granted to
the Optionee by a fraction, the numerator of which is the Optionee's total whole
years of service since the Options were granted and the denominator of which is
three. With respect to these vested Options, the Options shall be exercisable
until one day less than 10 years following the date of the Optionee's
retirement. If the Optionee shall be retired in good standing from the employ of
the Company under the then established rules of the Company on or after three
years from the date such Options were granted, such Options shall continue until
one day less than 10 years after the date the Option became first exercisable.

     (d) DISABILITY. If the Optionee shall be severed from the employ of the
Company for disability prior to three years from the date such Options were
granted, the Options shall be immediately be exercisable and continue in effect
until one day less than 10 years following the date he severed from the employ
of the Company for disability. If the Optionee shall be severed from the employ
of the Company for disability on or after three years from the date such Options
were granted, the Options shall continue in effect until one day less than ten
years after the date the Option became first exercisable.

     7. Amendment. This Agreement may not be changed, amended or modified except
by an agreement in writing signed on behalf of each of the parties hereto.

     8. No Rights as a Stockholder. The Optionee shall not have any rights as a
stockholder with respect to any shares of Common Stock issuable upon the
exercise of the Option until the date of issuance of the stock certificate or
certificates representing such shares following the Optionee's exercise of the
Option pursuant to its terms and conditions and payment for such shares. Except
as otherwise provided in the Plan, no adjustment shall be made for dividends or
other distributions made with respect to the Common Stock the record date for
the payment of which is prior to the date of issuance of the stock certificate
or certificates representing such shares following the Employee's exercise of
the Option.

     9. Governing Law. The validity, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware. Any invalidity
of any provision of this Agreement shall not affect the validity of any other
provision.

     10. Notices. All notices, demands, requests or other communications
hereunder shall be in writing and shall be deemed to have been duly made or
given if mailed by registered or certified mail, return receipt requested. Any
such notice mailed to the Company shall be addressed to its principal executive
office at 5 Post Oak Park, Suite 1760, Houston, Texas 77027-3415, and any notice
mailed to the Optionee shall be addressed to the Employees's residence address
as it appears

                                       4

<PAGE>   21

on the books and records of the Company or to such other address as either party
may hereafter designate in writing to the other.

     11. Employment Obligation. The granting of the Option by the Company to the
Optionee shall not impose upon the Company any obligation to employ or continue
to employ the Optionee; and the right of the Company to terminate the employment
of the Optionee with the Company shall not be diminished or affected by reason
of the grant of the Option to the Optionee pursuant to this Agreement.

     12. Binding Effect. This Agreement shall, except as otherwise provided to
the contrary in this Agreement or in the Plan, inure to the benefit of and bind
the successors and assigns of the Company. This Agreement shall, except as
otherwise provided to the contrary in this Agreement, inure to the benefit of
and bind the heirs, executors, administrators and legal representatives of the
Optionee.

                                       5

<PAGE>   22

     IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as
of the day and year first above mentioned.

                                        WEATHERFORD INTERNATIONAL, INC.

                                        By:
                                           ------------------------------------
                                        Name:
                                             ----------------------------------
                                        Title:
                                              ---------------------------------

                                        ---------------------------------------
                                                       Optionee

                                       6

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