Document:

<PAGE>   1

                                  EXHIBIT 10.9

PETSEC ENERGY INC.
143 Ridgeway Drive, Suite 113
Lafayette, Louisiana 70503
Attn:    Mr. James E. Slatten III
         Vice President, Land & Legal

Dear Mr. Slatten:

The purpose of this letter is to confirm the understanding and agreement (the
"Agreement") with Petsec Energy Inc. (the "Company") concerning the engagement
of Houlihan Lokey Howard & Zukin Capital, L.P. ("Houlihan Lokey") by Akin, Gump,
Strauss, Hauer & Feld, L.L.P. ("Bondholders' Counsel"), as counsel to the
Subcommittee (as herein defined), to assist it in its representation of an
informal negotiating subcommittee (the "Subcommittee") of beneficial holders
(the "Bondholders") of $100 million 9.5% senior subordinated bonds due 2007 (the
"Bonds") issued by the Company. Houlihan Lokey has been retained by Bondholders'
Counsel to provide financial advisory services in connection with the analysis,
consideration and possible formulation of potential financial restructuring
options for the Company's discussions with the Subcommittee.

The Company has notified the Subcommittee that it wishes to discuss the possible
formulation of a financial restructuring of the Bonds, which will benefit the
Company. In consideration of the Subcommittee's participation in such
discussions, and to allow Bondholders' Counsel to analyze restructuring concepts
and proposals (to the extent presented) and discuss them with the Subcommittee,
the Company has agreed to compensate Houlihan Lokey and to undertake the
indemnification obligations to Houlihan Lokey pursuant to the terms of this
Agreement. Neither the Subcommittee, their constituents, nor any of their
advisors or professionals (including, but not limited to, Bondholders' Counsel)
shall be liable for the fees and expenses payable to Houlihan Lokey hereunder.
Notwithstanding such arrangement, Houlihan Lokey's duties hereunder run solely
to Bondholders' Counsel on behalf of the Subcommittee and Houlihan Lokey is not
authorized to be, and will not purport to be, an agent of the Company for any
purpose. All communication and correspondence between Houlihan Lokey and
Bondholders' Counsel and the Subcommittee, and all work product and analyses
prepared by Houlihan Lokey for Bondholders' Counsel in connection with this
matter, are subject to the attorney-client privilege and work-product privilege.

Upon execution of this Agreement, the Company shall pay Houlihan Lokey a fee of
$75,000 per month (the "Monthly Fee") (for a minimum of three months, or
$225,000 (the "Minimum Fee")), plus additional fees (the "Transaction Fee")
payable in accordance with the terms set forth in Exhibit A, plus reasonable
out-of-pocket expenses that are incurred by Houlihan Lokey on behalf of
Bondholders' Counsel. The Company shall pay the Monthly Fee by the 15th day of
each month, in advance for the month, plus reimbursement for reasonable and
documented out-of-pocket expenses for each month. Payment shall be made to
Houlihan Lokey at the address above, Attention: Andrew B. Miller. Out-of-pocket
expenses shall include, but not be limited to, all documented and reasonable
travel expenses, duplicating charges, computer charges, messenger services and
long-distance telephone calls incurred by Houlihan Lokey.

<PAGE>   2

Petsec Energy Inc.
Page 2

This Agreement is terminable upon thirty (30) days' written notice by the
Company, Houlihan Lokey or Bondholders' Counsel (as instructed by a majority of
the Subcommittee); provided, however, that, (a) if the Agreement is so
terminated during the first three months, the Company shall immediately upon
such termination pay Houlihan Lokey the unpaid portion of its Minimum Fee, and
(b) if the Agreement is so terminated during or after the fourth month, Houlihan
Lokey shall be paid all previously earned Monthly Fees (if unpaid) and the
prorata portion of its Monthly Fee for the month of final termination. This
Agreement will automatically terminate upon the closing of a consensual
restructuring transaction supported by the relevant majority of the holders of
outstanding Bonds.

In the event the Company becomes a debtor-in-possession in a case under Title 11
of the United States Code (the "Bankruptcy Code"), the Company shall use its
best efforts to (a) assume this Agreement as an executory contract as part of a
confirmed plan of reorganization, or (b) otherwise fulfill its obligations under
this Agreement in a manner mutually agreeable to both the Company and Houlihan
Lokey. The form of documentation to satisfy the forgoing commitment shall be
acceptable to Houlihan Lokey in its sole discretion. After a bankruptcy filing,
Houlihan Lokey shall not be required to perform any services under this
Agreement until the entry of an Order (as defined herein). The Subcommittee, by
acknowledging below, hereby requires the payment of Houlihan Lokey's fees
hereunder as a condition to their consent to any restructuring transaction.
Notwithstanding the preceding, in the event the Company commences a case under
the Bankruptcy Code, Houlihan Lokey's further performance hereunder is subject
to the entry of an order (an "Order") of the United States Bankruptcy Court
having jurisdiction over such case approving the retention of Houlihan Lokey
pursuant to the terms hereof. The Company shall use its best efforts to obtain
prompt authorization of the retention of Houlihan Lokey pursuant to section
328(a) of the Bankruptcy Code on the terms and provisions in this Agreement. The
Order approving the Agreement and authorizing the retention shall be acceptable
to Houlihan Lokey in its sole discretion.

The Company understands that Houlihan Lokey will not be responsible for
independently verifying the accuracy of the information provided by the Company
(the "Information") and shall not be liable for inaccuracies in any Information
provided by the Company to Houlihan Lokey. The Company will use reasonable
efforts to assure that all Information provided to Houlihan Lokey by the Company
will, as of its respective dates, be the most accurate and complete information
that is available. Furthermore, the Company will use reasonable efforts to
cooperate with Houlihan Lokey in connection with the performance of Houlihan
Lokey's obligations under this Agreement.

As a material part of the consideration for Houlihan Lokey to furnish its
services under this Agreement, the Company agrees to indemnify and hold harmless
Houlihan Lokey and its affiliates, and their respective past, present and future
directors, officers, shareholders, employees, agents and controlling persons
within the meaning of either Section 15 of the Securities Act of 1933, as
amended, or Section 20 of the Securities Exchange Act of 1934, as amended
(collectively, the "Indemnified Parties"), to the fullest extent lawful, from
and against any and all losses, claims, damages or liabilities (or actions in
respect thereof), joint or several, arising out of or related to the Agreement,
any actions taken or omitted to be taken by an Indemnified Party in connection
with Houlihan Lokey's provision of services to the Subcommittee and/or
Bondholders' Counsel, or any Transaction (as defined herein) or proposed
Transaction contemplated thereby. In addition, the

<PAGE>   3

Petsec Energy Inc.
Page 3

Company agrees to reimburse the Indemnified Parties for any legal or other
expenses reasonably incurred by them in respect thereof at the time such
expenses are incurred; provided, however, the Company shall not be liable under
the foregoing indemnity and reimbursement agreement for any loss, claim, damage
or liability which is finally judicially determined to have resulted primarily
from the willful misconduct or gross negligence of any Indemnified Party.

If for any reason the foregoing indemnification is unavailable to any
Indemnified Party or insufficient to hold it harmless, the Company shall
contribute to the amount paid or payable by the Indemnified Party as a result of
such losses, claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative benefits received (or anticipated to be
received) by the Company, on the one hand, and Houlihan Lokey, on the other
hand, in connection with the actual or potential Transaction and/or the services
rendered by Houlihan Lokey. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or otherwise,
then the Company shall contribute to such amount paid or payable by any
Indemnified Party in such proportion as is appropriate to reflect not only such
relative benefits, but also the relative fault of the Company, on the one hand,
and Houlihan Lokey, on the other hand, in connection therewith, as well as any
other relevant equitable considerations. Notwithstanding the foregoing, the
aggregate contribution of all Indemnified Parties to any such losses, claims,
damages, liabilities and expenses shall not exceed the amount of fees actually
received by Houlihan Lokey pursuant to the Agreement.

The Company shall not affect any settlement or release from liability in
connection with any matter for which an Indemnified Party would be entitled to
indemnification from the Company, unless such settlement or release contains a
release of the Indemnified Parties reasonably satisfactory in form and substance
to Houlihan Lokey. The Company shall not be required to indemnify any
Indemnified Party for any amount paid or payable by such party in the settlement
or compromise of any claim or action without the Company's prior written
consent.

The Company further agrees that neither Houlihan Lokey nor any other Indemnified
Party shall have any liability, regardless of the legal theory advanced, to the
Company or any other person or entity (including the Company's equity holders
and creditors) related to or arising out of Houlihan Lokey's engagement, except
for any liability for losses, claims, damages, liabilities or expenses incurred
by the Company which are finally judicially determined to have resulted
primarily from the willful misconduct or gross negligence of any Indemnified
Party. The indemnity, reimbursement, contribution and other obligations and
agreements of the Company set forth herein shall apply to any modifications of
this Agreement, shall be in addition to any liability which the Company may
otherwise have, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company and each
Indemnified Party. The foregoing indemnification provisions shall survive the
consummation of any Transaction and/or any termination of the relationship
established by this Agreement.

The obligations of Houlihan Lokey are solely corporate obligations, and no
officer, director, employee, agent, shareholder or controlling person of
Houlihan Lokey shall be subjected to any personal liability whatsoever to any
person, nor will any such claim be asserted by or on behalf of any other party
to this Agreement or any person relying on the services provided hereunder. The
Company's obligations with respect to any and all

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Petsec Energy Inc.
Page 4

payments owing to Houlihan Lokey and the indemnification, reimbursement,
contribution and other similar obligations of the Company under this Agreement
shall survive any termination of this Agreement.

Dated as of the 15th day of February 2000.

PETSEC ENERGY INC.

By:      /s/ R. A. Keogh
         -------------------------------

Name:    R. A. Keogh
         -------------------------------

Title:   V. P. & Chief Financial Officer
         -------------------------------

HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL, L.P.

By:      /s/ Andrew B. Miller
         -------------------------------
         Andrew B. Miller
         Managing Director

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Petsec Energy Inc.
Page 5

ACKNOWLEDGED AS OF THE DATE SET FORTH ABOVE:

INFORMAL NEGOTIATING SUBCOMMITTEE OF PETSEC ENERGY INC.

By:      /s/ William Wall
         -------------------------------

Name:    William Wall
         -------------------------------

Title:   Assistant General Counsel
         -------------------------------

AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

By:      /s/ Michael S. Stamer
         -------------------------------

Name:    Michael S. Stamer
         -------------------------------

Title:   Partner
         -------------------------------

<PAGE>   6

Petsec Energy Inc.
Page 6

                                    EXHIBIT A

         This Exhibit A is part of and incorporated into the attached Agreement.

         1.       Monthly Fees. The Company shall pay Houlihan Lokey a Monthly
                  Fee of $75,000.00 per month. The Monthly Fees shall terminate
                  after the earlier of (x) the date this Agreement is
                  terminated; or (y) the closing of a Transaction (defined
                  below).

         2.       Transaction Fee. If a Transaction is proposed, which the
                  Subcommittee supports, and which is consummated either in or
                  out of court, Houlihan Lokey shall be entitled to a
                  Transaction Fee in the amounts set forth on the following
                  Schedule upon the consummation of any Subcommittee-approved
                  Transaction, including, without limitation, a Transaction
                  which is completed pursuant to an exchange offer, consent
                  solicitation, or case under the Bankruptcy Code (collectively,
                  a "Transaction"). Upon the completion of a Transaction , the
                  Transaction Fee shall be payable in cash or, at the election
                  of the Subcommittee, in such consideration and proportions as
                  is received or to be received by the Bondholders.

                  If a Transaction is consummated, Houlihan Lokey shall be
                  entitled to a Transaction Fee based on the Bondholders'
                  Recovery as per the following schedule:

<TABLE>
<CAPTION>
         BONDHOLDERS RECOVERY                                        TRANSACTION FEE
         --------------------                                        ---------------
<S>                                         <C>
     Less than $60 Million                  $0
     Over $60 Million to $70 Million        2% of aggregate Bondholders Recovery over $60 Million
     Over $70 Million to $80 Million        Above plus 3% of aggregate Bondholders Recovery over $70 Million
     Over $80 Million to $90 Million        Above plus 4% of aggregate Bondholders Recovery over $80 Million
     Over $90 Million                       Above plus 5% of aggregate Bondholders Recovery over $90 Million
</TABLE>

                  As used herein, the term "Transaction" shall include the
                  consummation of any agreement or series of agreements, or
                  transaction or series of transactions and the receipt of
                  consideration by the Bondholders, which in each case may
                  include, but are not limited to, the following:

                  (a) Reinstatement or material credit enhancement of the
                  existing Bonds in conjunction with a broader transaction
                  involving the Company;

                  (b) The consummation of an out-of-court
                  restructuring/recapitalization through an exchange offer,
                  consent solicitation or other mechanism which has been
                  accepted by such number and

<PAGE>   7

Petsec Energy Inc.
Page 7

                  amount of Bonds and Bondholders as may be required to
                  effectuate such Transaction;

                  (c) The completion of a tender offer for, or acquisition of,
                  the Bonds which has been accepted by such number and amount of
                  Bonds and Bondholders as may be required to effectuate such
                  Transaction;

                  (d) The closing of any sale, transfer or assumption of all or
                  substantially all of the assets, liabilities or stock of the
                  Company (including without limitation any consolidation or
                  merger involving the Company); or

                  (e) The effective date of a confirmed Chapter 11 plan of
                  reorganization, the terms of which have been substantially
                  agreed to by the Subcommittee.

                  "Bondholders Recovery" shall be defined as any consideration
                  received by the Bondholders in respect of the Bonds,
                  including, without limitation, cash, securities (debt or
                  equity), property or other interests or consideration. In the
                  event that the consideration received in a Transaction is paid
                  in whole or in part in some form of equity securities of
                  another company (or a reorganized Petsec), the value of such
                  securities, for purposes of calculating the Contingent Fee,
                  shall be the fair market value thereof, as the parties hereto
                  shall mutually agree, on the day prior to the consummation of
                  such Transaction; provided, however, that if such securities
                  consist of securities with an existing public trading market,
                  the value thereof shall be determined by the last sales price
                  for such securities on the last trading day thereof prior to
                  such consummation. Any debt securities shall be valued at
                  their face amount.

3.                Offset of Monthly Fees. If a Transaction Fee is payable to
                  Houlihan Lokey, then, one-third of all Monthly Fees earned
                  during the fourth through sixth months; two-thirds of all
                  Monthly Fees earned during the seventh through ninth months
                  and all of the Monthly Fees earned from the tenth month on
                  shall be applied as an offset against the Transaction Fee,
                  provided however that in no event will such adjusted
                  Transaction Fee be reduced to less than $0.

                  For illustrative purposes, if a Transaction generating $75
                  million in Bondholders Recovery is closed in the fifth month,
                  then the Transaction Fee would equal $350,000 (i.e., .02 x $10
                  million, plus .03 x $5 million), which shall be offset by
                  $50,000 (i.e., 1/3 of the $75,000 Monthly Fee for each of the
                  fourth and fifth months), resulting in a total Transaction Fee
                  of $300,000.<PAGE>   1
                                                                   EXHIBIT 10.10

                               PETSEC ENERGY INC.

                            YEAR 2000 SEVERANCE PLAN

         The PETSEC ENERGY INC. YEAR 2000 SEVERANCE PLAN (the "Plan") is hereby
adopted effective as of January 1, 2000 pursuant to the authorization of the
Board of Directors of PETSEC ENERGY INC. (the "Company") for its eligible
employees as follows:

                                       I.

                          DEFINITIONS AND CONSTRUCTION

         1.1 DEFINITIONS. Where the following words and phrases appear in the
Plan, they shall have the respective meanings set forth below, unless their
context clearly indicates to the contrary.

                  (a) "BASE SALARY" shall mean, as of a given date and with
         respect to a particular Covered Employee, the aggregate base salary
         received by such Covered Employee from the Company during the 12-month
         period preceding such date; provided, however, that if a Covered
         Employee has not been employed by the Company during such entire
         12-month period, then such Covered Employee's Base Salary shall equal
         his or her annual base salary at the rate in effect immediately prior
         to such date.

                  (b) "BOARD" shall mean the Board of Directors of the Company.

                  (c) "CHANGE IN TERMS OF EMPLOYMENT" shall mean the occurrence,
         at any time during the period beginning on January 1, 2000 and ending
         on December 31, 2000, of any of the following:

                           (1) a reduction of more than 10% in the annual rate
                  of base salary paid by the Company to a Covered Employee from
                  that provided to him immediately prior to January 1, 2000;

                           (2) a change in the location of a Covered Employee's
                  primary place of employment by the Company by more than 30
                  miles from the location where he was primarily employed
                  immediately prior to January 1, 2000; or

                           (3) a material reduction (as determined by the
                  Committee in its reasonable discretion) of a Covered
                  Employee's job responsibilities, duties or authority with the
                  Company from that exercised by him immediately prior to
                  January 1, 2000.

<PAGE>   2

                  (d) "CODE" shall mean the Internal Revenue Code of 1986, as
         amended.

                  (e) "COMMITTEE" shall mean the administrative committee
         appointed in accordance with Section 3.2 to administer the Plan.

                  (e) "COMPANY" shall mean Petsec Energy Inc., a Nevada
         corporation.

                  (f) "COVERED EMPLOYEE" shall mean any individual who on
         December 31, 1999, is a regular, full-time salaried employee of the
         Company or an hourly employee of the Company who is normally scheduled
         to work 1,750 or more hours per year, other than (1) any individual
         whose terms of employment are governed by a collective bargaining
         agreement between a collective bargaining unit and the Company unless
         such agreement provides for coverage of such individual under the Plan,
         and (2) any individual who is classified, designated, compensated, or
         otherwise treated by the Company as a temporary employee, a casual
         employee, or an independent contractor.

                  (h) "ERISA" shall mean the Employee Retirement Income Security
         Act of 1974, as amended.

                  (i) "INVOLUNTARY TERMINATION" shall mean any termination of a
         Covered Employee's employment with the Company which:

                           (1) does not result from a voluntary resignation by
                  the Covered Employee (other than a resignation pursuant to
                  Clause (2) of this Section 1.1(i); or

                           (2) results from a resignation by a Covered Employee
                  on or before the date which is 60 days after the date the
                  Covered Employee receives notice of a Change in Terms of
                  Employment;

         provided, however, that the term "Involuntary Termination" shall not
         include a Termination for Cause or any termination as a result of a
         Covered Employee's death, disability under circumstances entitling him
         to benefits under the Company's long-term disability plan or
         Retirement.

                  (j) "RETIREMENT" shall mean the Covered Employee's resignation
         on or after the date he reaches age sixty-five.

                  (k) "TERMINATION FOR CAUSE" shall mean any termination of a
         Covered Employee's employment with the Company by reason of such
         Covered Employee's (1) engaging in gross negligence or willful
         misconduct in the performance of his duties, (2) willfully refusing
         without proper legal reason to perform his duties and responsibilities,
         (3) materially breaching any material provision of any agreement
         between such Covered Employee and the Company, (4) materially breaching
         any material corporate policy

                                      -2-
<PAGE>   3

         maintained and established by the Company that is of general
         applicability to the Company's employees, (5) willfully engaging in
         conduct that such Covered Employee knows or should know is materially
         injurious to the Company, or (6) engaging in illegal conduct or any act
         of serious dishonesty which adversely affects, or reasonably could in
         the future adversely affect, such Covered Employee's value,
         reliability, or performance in a material manner.

                  (l) "WARN ACT" shall mean the United States Worker Adjustment
         and Retraining Notification Act, as amended.

                  (m) "YEARS OF SERVICE" shall mean, with respect to a
         particular Covered Employee, the sum of (1) each full year of such
         Covered Employee's continuous employment by the Company, an affiliate
         of the Company and Climax Mining Limited (which was, but is no longer
         an affiliate of the Company) from his most recent date of hire (the
         "Most Recent Date of Hire") to the date his employment is subject to an
         Involuntary Termination (the "Termination Date") and (2) the quotient
         obtained by dividing (i) the number of such Covered Employee's full
         weeks of continuous employment by the Company or an affiliate of the
         Company from the Anniversary Date (as hereinafter defined) to the
         Termination Date by (ii) 52. For purposes of the preceding sentence,
         the term "Anniversary Date" shall mean (A) with respect to a Covered
         Employee who has zero Years of Service pursuant to clause (1) of the
         preceding sentence, such Covered Employee's Most Recent Date of Hire,
         and (B) with respect to a Covered Employee who has one or more Years of
         Service pursuant to clause (1) of the preceding sentence, the
         anniversary of such Covered Employee's Most Recent Date of Hire that is
         coincident with or next preceding the Termination Date.

         1.2 NUMBER AND GENDER. Wherever appropriate herein, any word used in
the singular shall be considered to include the plural and the plural to include
the singular. The masculine gender, where appearing in this Plan, shall be
deemed to include the feminine gender.

         1.3 HEADINGS. The headings of Articles and Sections herein are included
solely for convenience and if there is any conflict between such headings and
the text of the Plan, the text shall control.

                                       II.

                               SEVERANCE BENEFITS

         2.1 SEVERANCE PAYMENT. Subject to the remaining Sections of this
Article II, if a Covered Employee's employment by the Company shall be subject
to an Involuntary Termination at any time during the period beginning on January
1, 2000 and ending on December 31, 2000, then such Covered Employee shall be
entitled to a severance payment in an amount equal to the sum of (a) 3/52 of
such Covered Employee's Base Salary multiplied by his Years of Service, plus (b)
1/4 of such Covered Employee's Base Salary (which Base Salary, for purposes of
clauses (a) and (b) of

                                      -3-
<PAGE>   4

this sentence, shall be determined as of the date of such Involuntary
Termination). Any severance payment payable pursuant to this Section 2.1 shall
be paid to the Covered Employee in a lump sum cash payment (less any required
tax withholding) within five days after his Involuntary Termination, subject to
the remaining Sections of this Article II.

         2.2 RELEASE AND FULL SETTLEMENT. Anything to the contrary herein
notwithstanding, as a condition to the receipt of any payment under Section 2.1,
a Covered Employee whose employment by the Company has been subject to an
Involuntary Termination shall first execute a release, in the form established
by the Committee, releasing the Committee, the Board, the Company, and the
Company's shareholders, partners, officers, directors, employees, affiliates,
and agents from any and all claims and from any and all causes of action of any
kind or character, including but not limited to all claims or causes of action
arising out of such Covered Employee's employment with the Company, the
termination of such employment, and the performance of the Company's obligations
hereunder, and the receipt of any benefits provided under Section 2.1 by such
Covered Employee shall constitute full settlement of all such claims and causes
of action.

         2.3 MITIGATION. A Covered Employee shall not be required to mitigate
the amount of any payment provided for in this Article II by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
this Article II be reduced by any compensation or benefit earned by the Covered
Employee as the result of employment by another Company or by retirement
benefits. Except as provided in Section 2.5, the benefits under the Plan are in
addition to any other benefits to which a Covered Employee is otherwise
entitled.

         2.4 EFFECT ON OTHER COMPANY BENEFITS. Except as provided in Section
2.5, any payment provided for in this Article II shall not be reduced by, but
shall be in addition to, any other benefits provided by the Company to which a
Covered Employee is otherwise entitled.

         2.5 OFFSET FOR OTHER SEVERANCE BENEFITS. A severance payment calculated
pursuant to Section 2.1 for a Covered Employee shall be reduced by any other
severance benefits, pay in lieu of notice, or other similar benefits payable to
such Covered Employee from or on behalf of the Company, which becomes payable on
account of such Covered Employee's Involuntary Termination pursuant to any
applicable law, statute, regulation, court order, contractual undertaking of the
Company or other legal requirement, including without limitation, the WARN Act;
provided, however, that if a severance payment calculated pursuant to Section
2.1 is reduced pursuant to the terms of this Section 2.5 as a result of payments
to a Covered Employee pursuant to the WARN Act, then the minimum severance
payment payable under the Plan to such Covered Employee shall not be less than
1/13 of such Covered Employee's Base Salary (determined as of the date of such
Covered Employee's Involuntary Termination).

                                      -4-
<PAGE>   5

         2.6 SEVERANCE PAY PLAN LIMITATION. The Plan is intended to be an
employee welfare benefit plan within the meaning of section 3(1) of ERISA and
the Labor Department regulations promulgated thereunder. Therefore, anything to
the contrary herein notwithstanding, in no event shall any Covered Employee
receive total severance payments under the Plan that exceed the equivalent of
twice such Covered Employee's "annual compensation" (as such term is defined in
29 CFR ss.2510.3-2(b)(2)) during the year immediately preceding his Involuntary
Termination. If total severance payments under the Plan to a Covered Employee
would otherwise exceed the limitation in the preceding sentence, then the amount
payable to such Covered Employee pursuant to Section 2.1 shall be reduced in
order to satisfy such limitation.

         2.7 PARACHUTE PAYMENTS. Anything to the contrary herein
notwithstanding, if the Covered Employee is a "disqualified individual" (as
defined in Section 280G(c) of the Code), and the benefits provided for in
Section 2.1, together with any other payments or benefits which the Covered
Employee has the right to receive from the Company and its affiliates, would
constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code),
the severance benefits provided hereunder shall be either (a) reduced (but not
below zero) so that the present value of such total amounts received by the
Covered Employee will be one dollar ($1.00) less than three times the Covered
Employee's "base amount" (as defined in Section 280G of the Code) and so that no
portion of such amounts received by the Covered Employee shall be subject to the
excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever
produces the better net after-tax position to the Covered Employee (taking into
account any applicable excise tax under Section 4999 of the Code and any
applicable income tax). The determination as to whether any such reduction in
the amount of the severance benefit is necessary shall be made by the Company in
good faith, and such determination shall be conclusive and binding on the
Covered Employee. If a reduced payment is made and through error or otherwise
that payment, when aggregated with other payments or benefits from the Company
(or its affiliates) used in determining if a "parachute payment" exists, exceeds
one dollar ($1.00) less than three times the Covered Employee's base amount, the
Covered Employee shall immediately repay such excess to the Company upon
notification that an overpayment has been made.

                                      III.

                             ADMINISTRATION OF PLAN

         3.1 APPOINTMENT OF COMMITTEE. The Plan shall be administered by the
Committee comprised initially of Ross A. Keogh and James E. Slatten III. The
Committee shall consist of at least two members. The members of the Committee
shall serve at the pleasure (and may be removed and replaced in the sole
discretion) of the Board and shall administer the Plan on behalf of the Company.
At any time during the term of his office, a member of the Committee may resign
by giving written notice to the Board and the Committee, such resignation to
become effective upon the appointment of a substitute member or, if earlier, the
lapse of thirty days after such notice is given as herein provided.

                                      -5-
<PAGE>   6

         3.2 COMMITTEE PROCEDURE. A majority of the members of the Committee
shall constitute a quorum. Action by the Committee may be taken at a meeting by
a vote of a majority of those present or without a meeting by unanimous consent
in writing of all members. If a majority of Committee members may not decide a
particular issue or take action with respect to the Plan because of the
application of Section 3.4, the Board shall take such action or decide such
matter. The Committee shall also designate the person or persons who shall be
authorized to sign for the Committee and, upon such designation, the signature
of such person or persons shall bind the Committee.

         3.3 COMMITTEE'S POWERS AND DUTIES. It shall be a principal duty of the
Committee to see that the Plan is carried out, in accordance with its terms, for
the exclusive benefit of persons entitled to participate in the Plan. The
Committee shall be the named fiduciary and shall have full power to administer
the Plan in all of its details, subject to applicable requirements of law. For
this purpose, the Committee's powers shall include, but not be limited to, the
following authority, in addition to all other powers provided by this Plan:

                  (a) to make and enforce such rules and regulations as it deems
         necessary or proper for the efficient administration of the Plan;

                  (b) to interpret the Plan, its interpretation thereof to be
         final and conclusive on all persons claiming benefits under the Plan;

                  (c) to decide all questions concerning the Plan and the
         eligibility of any person to participate in the Plan;

                  (d) to make a determination as to the right of any person to a
         benefit under the Plan (including, without limitation, to determine
         whether and when there has been a termination of a Covered Employee's
         employment and the cause of such termination);

                  (e) to appoint such agents, counsel, accountants, consultants,
         claims administrator and other persons as may be required to assist in
         administering the Plan;

                  (f) to allocate and delegate its responsibilities under the
         Plan and to designate other persons to carry out any of its
         responsibilities under the Plan, any such allocation, delegation or
         designation to be in writing;

                  (g) to sue or cause suit to be brought in the name of the
         Plan; and

                  (h) to obtain from the Company and from Covered Employees such
         information as is necessary for the proper administration of the Plan.

                                      -6-
<PAGE>   7

         3.4 MEMBER'S OWN PARTICIPATION. No Covered Employee or agent of the
Committee may act, vote, or otherwise influence a decision of the Committee
specifically relating to himself as a participant in the Plan.

         3.5 INDEMNIFICATION. The Company shall indemnify and hold harmless each
member of the Committee against any and all expenses and liabilities arising out
of his administrative functions or fiduciary responsibilities, including any
expenses and liabilities that are caused by or result from an act or omission
constituting the negligence of such member in the performance of such functions
or responsibilities, but excluding expenses and liabilities that are caused by
or result from such member's own gross negligence or willful misconduct.
Expenses against which such member shall be indemnified hereunder shall include,
without limitation, the amounts of any settlement or judgment, costs, counsel
fees, and related charges reasonably incurred in connection with a claim
asserted or a proceeding brought or settlement thereof.

         3.6 COMPENSATION, BOND AND EXPENSES. The members of the Committee shall
not receive compensation with respect to their services for the Committee. To
the extent required by applicable law, but not otherwise, Committee members
shall furnish bond or security for the performance of their duties hereunder.
Any expenses properly incurred by the Committee incident to the administration,
termination or protection of the Plan, including the cost of furnishing bond,
shall be paid by the Company.

         3.7 CLAIMS PROCEDURE. Any employee that the Committee determines is
entitled to a benefit under the Plan is not required to file a claim for
benefits. Any employee who is not paid a benefit and who believes that he is
entitled to a benefit or who has been paid a benefit and who believes that he is
entitled to a greater benefit may file a claim for benefits under the Plan in
writing with the Committee. In any case in which a claim for Plan benefits by a
Covered Employee is denied or modified, the Committee shall furnish written
notice to the claimant within 90 days (or within 180 days if additional
information requested by the Committee necessitates an extension of the 90-day
period), which notice shall:

                  (a) state the specific reason or reasons for the denial or
         modification;

                  (b) provide specific reference to pertinent Plan provisions on
         which the denial or modification is based;

                  (c) provide a description of any additional material or
         information necessary for the Covered Employee or his representative to
         perfect the claim, and an explanation of why such material or
         information is necessary; and

                  (d) explain the Plan's claim review procedure as contained
         herein.

In the event a claim for Plan benefits is denied or modified, if the Covered
Employee or his representative desires to have such denial or modification
reviewed, he must, within 60 days

                                      -7-
<PAGE>   8

following receipt of the notice of such denial or modification, submit a written
request for review by the Committee of its initial decision. In connection with
such request, the Covered Employee or his representative may review any
pertinent documents upon which such denial or modification was based and may
submit issues and comments in writing. Within 60 days following such request for
review the Committee shall, after providing a full and fair review, render its
final decision in writing to the Covered Employee and his representative, if
any, stating specific reasons for such decision and making specific references
to pertinent Plan provisions upon which the decision is based. If special
circumstances require an extension of such 60-day period, the Committee's
decision shall be rendered as soon as possible, but not later than 120 days
after receipt of the request for review. If an extension of time for review is
required, written notice of the extension shall be furnished to the Covered
Employee and his representative, if any, prior to the commencement of the
extension period.

                                       IV.

                               GENERAL PROVISIONS

         4.1 FUNDING. The benefits provided herein shall be unfunded and shall
be provided from the Company's general assets.

         4.2 COST OF PLAN. The entire cost of the Plan shall be borne by the
Company and no contributions shall be required of the Covered Employees.

         4.3 PLAN YEAR. The Plan shall operate on a plan year consisting of the
twelve consecutive month period commencing on January 1 of each year with a
short plan year commencing on the Effective Date and ending on December 31,
2000.

         4.4 AMENDMENT AND TERMINATION. The Plan may be amended from time to
time, or terminated and discontinued, at any time, in each case at the
discretion of the Board. Notwithstanding the foregoing, the Plan may not be
amended to reduce benefits or rights to benefits or terminated with respect to
benefits under Section 2.1, at any time during the period beginning on January
1, 2000 and ending on December 31, 2000. The Plan shall automatically terminate
without any action of the Board on December 31, 2000.

         4.5 NOT CONTRACT OF EMPLOYMENT. The adoption and maintenance of the
Plan shall not be deemed to be a contract of employment between the Company and
any person or to be consideration for the employment of any person. Nothing
herein contained shall be deemed to give any person the right to be retained in
the employ of the Company or to restrict the right of the Company to discharge
any person at any time nor shall the Plan be deemed to give the Company the
right to require any person to remain in the employ of the Company or to
restrict any person's right to terminate his employment at any time.

         4.6 SEVERABILITY. Any provision in the Plan that is prohibited or
unenforceable in any

                                      -8-
<PAGE>   9

jurisdiction by reason of applicable law shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

         4.7 NONALIENATION. Covered Employees shall not have any right to
pledge, hypothecate, anticipate or assign benefits or rights under the Plan,
except by will or the laws of descent and distribution.

         4.8 EFFECT OF PLAN. The Plan is intended to supersede all prior oral or
written policies of the Company and all prior oral or written communications to
Covered Employees with respect to the subject matter hereof, and all such prior
policies or communications are hereby null and void and of no further force and
effect. Further, the Plan shall be binding upon the Company and any successor of
the Company, by merger or otherwise, and shall inure to the benefit of and be
enforceable by the Company's Covered Employees.

         4.9 GOVERNING LAW. The Plan shall be interpreted and construed in
accordance with the laws of the State of Louisiana, except to the extent
preempted by federal law.

         EXECUTED this 31st day of December, 1999.
                       ----

                                PETSEC ENERGY INC.

                                BY:       /s/ T. N. FERN
                                    --------------------------------------------
                                NAME:    T.N. Fern
                                      ------------------------------------------
                                TITLE:   C.E.O.
                                       -----------------------------------------

                                      -9-

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