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                                                                   Exhibit 10.77

                              SEPARATION AGREEMENT

     This agreement ("Agreement") is made among Michael J. McGhan, an individual
residing in Spring, Texas ("McGhan"), Hanover Compressor Company, a Delaware
corporation ("HCC"), and Hanover Compression Limited Partnership ("Hanover
Compression," and together with HCC, "Hanover") following significant
negotiation by both parties, fully represented by counsel.

     WHEREAS, McGhan has served as the Chief Executive Officer and President of
HCC since October 1991, and as a Director of HCC since March 1992;

     WHEREAS, McGhan is one of the founders of Hanover, which was founded in
1990;

     WHEREAS, McGhan has provided years of valuable service to Hanover;

     WHEREAS, today, HCC is a global market leader in full service natural gas
compression and a leading provider of service, fabrication and equipment for
contract natural gas application;

     WHEREAS, HCC believes it is currently the largest natural gas compressor
company in the United States on the basis aggregate market horsepower;

     NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Hanover and McGhan, intending to be
legally bound, hereby agree as follows:

1.   Effective Date. The Agreement will become final, binding and enforceable on
     August 1, 2002 (the "Effective Date").

2.   Resignations. Hanover and McGhan have mutually determined that it is in the
     best interest of both parties to sever the current relationships with each
     other, including the employment relationships of McGhan with Hanover and
     its affiliates. Hanover agrees that McGhan may resign from employment, and
     McGhan hereby resigns as of the Effective Date from all positions he holds
     as an employee, agent, officer, director and/or representative of (i) HCC
     and its subsidiaries and affiliates (collectively, the "Hanover Entities")
     and (ii) any entity in which HCC may hold, directly or indirectly, any
     interest.

3.   Payments to McGhan.  Hanover agrees as follows:

          a. Within three (3) business days after the Effective Date, Hanover
          will deliver to McGhan a final paycheck for all wages earned through
          the Effective Date, plus three (3) weeks vacation, less any and all
          customary and usual deductions or withholdings.

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          b. Within thirty (30) days after the Effective Date, Hanover will
          reimburse McGhan for all necessary and reasonable expenses that McGhan
          has incurred on behalf of Hanover or any of its affiliates prior to
          the Effective Date, according to the standard policies and procedures
          of Hanover regarding reimbursement of such expenses.

          c. Hanover shall make the monthly payments specified in Paragraph 9.

          d. Except as otherwise specifically provided in this Agreement, McGhan
          will not be eligible to participate in or accumulate any credit under
          the provisions of any retirement plan, the vacation policy, or any
          other employee benefit plan or policy of Hanover as of the Effective
          Date. No further bonus will be paid to McGhan under any bonus plan or
          policy. It is understood that McGhan maintains the right to and
          ownership of all vested amounts in his name as of the Effective Date
          in any existing 401(k) plan, other pension or retirement plan
          maintained by Hanover.

4.   Stock Options. It is expressly agreed that McGhan may exercise any
     unexercised vested outstanding options ("Stock Options") granted to McGhan
     pursuant to any of HCC's various stock option plans and stock option
     agreements between McGhan and HCC (such stock option plans and stock option
     agreements being herein collectively referred to as the "Stock Option
     Agreements"), but only in accordance with the terms and provisions of the
     operative Stock Option Agreement, including those provisions relating to
     termination of employment. Stock Options that have not vested before the
     Separation Date shall be forfeited. No further stock option awards,
     accruals, vesting, or payments of any kind will be made to McGhan for any
     plan year. In connection with any exercise of any Stock Options, McGhan
     shall first fully satisfy and fund HCC's tax withholding obligations, if
     any, that may arise in connection with McGhan's exercise of such Stock
     Option. In addition, McGhan agrees that (i) in connection with each
     exercise of any Stock Option, McGhan will immediately deliver the
     certificates evidencing the resulting shares of stock (the "Option Shares")
     to HCC in freely transferable form as collateral for the repayment of the
     Existing Loans (as defined below) together with such stock powers,
     financing statements and security agreements as HCC shall reasonably
     require to evidence and perfect a first priority security interest in the
     Option Shares and (ii) within five (5) business days after Hanover presents
     initial drafts to McGhan, McGhan will execute and deliver to HCC such
     security agreements and financing statements as HCC shall reasonably
     require to evidence and perfect a first priority security interest in any
     Option Shares that have been, or may in the future be, issued pursuant to
     the Stock Options (collectively the "2002 Stock Pledge Agreements"). All
     Option Shares shall secure the Existing Loans pursuant to the terms of the
     2002 Stock Pledge Agreements and on terms consistent with this Agreement.
     The 2002 Stock Pledge Agreements shall include provisions that allow or
     require, as indicated below, the sale of all or a portion of the Option
     Shares covered thereby and the application of the resulting proceeds to the
     following in the following order of priority:

          a. First, at McGhan's option, to pay or prepay any principal or
          interest under the Existing Loans (as defined below);

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         b. Second, at the time of the last exercise (or lapse, if earlier) of
         the foregoing Stock Options, a determination shall be made of the
         federal income taxes that will accrue (at the maximum marginal federal
         income tax rate for the year 2002 for individuals filing jointly) as a
         result of the grant and exercise of the foregoing Stock Options (less
         the amount of required tax withholding by HCC) and a number of Option
         Shares having a market value at such time equal to the amount of such
         taxes, plus cost of sale, shall be released from the 2002 Stock Pledge
         Agreements and delivered to McGhan; and

         c. Third, at McGhan's option, the remaining Option Shares may be sold
         and the resulting proceeds, less actual cost of sale, shall be
         delivered to HCC as substitute cash collateral for the repayment of for
         the $1,700,000 Loan and the $500,000 Loan and deposited by HCC into an
         interest bearing depository account under the control of HCC (such sums
         being referred to herein as the "Cash Collateral"), with such interest
         to accrue in such account to McGhan.

5.   Property. Except as otherwise provided herein, no equipment or materials or
     property owned by Hanover or McGhan shall be transferred between McGhan and
     Hanover. McGhan agrees that, on or prior to the Effective Date, McGhan will
     return or relinquish all Hanover credit cards, computers (including all
     files saved thereon), office space, furniture, equipment, files, books, and
     other company equipment, materials or property in his possession. McGhan is
     entitled to all of his personal property that is currently on Hanover
     premises, and Hanover agrees to return and relinquish the same.

6.   Existing Loans. McGhan and wife, Ruth McGhan (collectively, "Makers"),
     agree as follows with respect to the three (3) loans evidenced by the
     following described Promissory Notes (collectively the "Existing Loans"):

         a. Promissory Note dated April 12, 2001 executed by Makers and payable
         to the order of Hanover Compression in the original principal amount of
         $1,700,000.00 as therein provided (the loan evidenced by such
         Promissory Note being herein referred to as the "$1,700,000.00 Loan");

         b. Promissory Note dated April 12, 2001 executed by Makers and payable
         to the order of Hanover Compression in the original principal amount of
         $500,000.00 as therein provided (the loan evidenced by such Promissory
         Note being herein referred to as the "$500,000.00 Loan"); and

         c. Unsecured Promissory Note dated January 29, 2002 executed by McGhan
         and payable to the order of Hanover Compression in the original
         principal amount of $400,000.00 as therein provided (the loan evidenced
         by such Promissory Note being herein referred to as the "$400,000.00
         Loan").

         6.1 Status of Existing Loans. With respect to each of the Existing
     Loans, Makers represent and warrant to Hanover that (i) Makers do not have
     any right of offset or setoff against the payment of any such Existing Loan
     or any defenses to payment of such Existing Loan, and (ii) the Promissory
     Note evidencing such Existing Loan, as described above, has

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     not been modified or amended, represents the entire agreement between
     Makers and Hanover concerning such Existing Loan, is in full force and
     effect, is a valid and subsisting obligation of Makers and is enforceable
     in accordance with the its terms.

         6.2. Collateral Test. In the event the sum of the total of the
     following is ever less than seventy-five percent (75%) of the unpaid
     principal balance of all of the Existing Loans, plus unpaid accrued
     interest thereon, all of the Option Shares shall be sold and the resulting
     proceeds thereof less actual cost of sale, shall be delivered to HCC as
     substitute cash collateral for the repayment of the Existing Loans and
     deposited into an interest bearing account under the control of HCC, with
     interest to accrue in such account to McGhan: (i) the market value of any
     unexercised, unexpired Stock Options described in Paragraph 4 above, being
     an amount equal to the difference between the then market value of the
     shares of stock of HCC (based on the average closing price of HCC stock
     over the immediately preceding thirty (30) day period) and the purchase
     price under such Stock Options, less usual and customary cost of sale; (ii)
     the market value of any Option Shares (based on the average closing price
     of HCC stock over the immediately preceding thirty (30) day period) pledged
     as security for the Existing Loans in accordance in with the requirements
     of Paragraph 4 above; plus; (iii) the amount of any Cash Collateral pledged
     as security for the Existing Loans in accordance with the requirements of
     Paragraph 4 above. No sale pursuant to this paragraph shall occur until ten
     (10) business days after Hanover has provided McGhan with written notice of
     the shortfall in collateral, and only, then, if within such ten (10) day
     period McGhan fails to grant Hanover a properly perfected first security
     interest in additional collateral of the type described above sufficient to
     allow the above 75% test to be satisfied. The foregoing collateral test
     shall not take into account any other collateral securing the Existing
     Loans, including, but not limited to any real estate.

         6.3 Partial Release at Deed of Trust Liens. As provided in the
     Promissory Notes evidencing the $1,700,000 Loan and $500,000 Loan, Makers
     have agreed to secure such Existing Loans by a Deed of Trust and Security
     Agreement covering, among other property, Lot 25, Block 9, in Walden on
     Lake Conroe, Section 2, a subdivision in Montgomery County, Texas,
     according to map or plat thereof recorded in Cabinet A, Sheet 62 (formerly
     Volume 10, Page 18) of the Map Records of Montgomery County Texas, together
     with easement rights to that certain 0.083 acre tract line adjacent to such
     Lot 25, as set forth in Easement Agreement filed under Clerk's File No.
     8941887 of the Real Property Records of Montgomery County, Texas
     (collectively herein referred to as the "Montgomery County Property" and
     such Deed of Trust and Security Agreement being herein referred to as the
     "McGhan Deed of Trust"). Hanover agrees that upon payment by Makers to
     Hanover of a prepayment of principal on the $1,700,000 Loan or $500,000
     Loan, or any combination thereof, in an amount equal to $500,000, Hanover
     will release the Montgomery County Property from the liens and security
     interest granted to Hanover in the McGhan Deed of Trust, but any such
     release shall not release any other liens or security interest securing the
     Existing Loans, including, but not limited to any liens or security
     interests against any other property covered by the McGhan Deed Trust or
     any replacement thereof.

          6.4. Further Assurances. Makers agree that they shall promptly execute
     and deliver all further agreements, and take all further action, that may
     be reasonably necessary or that Hanover may reasonably request, in order to
     further evidence the Existing Loans and/or the

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     liens, security interests, and assignments granted or purported to be
     granted as security for the Existing Loans and perfect and protect the same
     or to enable Hanover to exercise and enforce Hanover's rights and remedies
     thereunder. Without limiting the foregoing, Makers shall at Hanover's
     reasonable request: (i) execute security agreements, deeds of trust,
     financing statements, amendments and continuations of financing statements,
     assignments, notices, and such other documents and agreements as Hanover
     may reasonably request in order to perfect and preserve the liens and
     security interests granted or purported to be granted as security for the
     Existing Loans and (ii) use reasonable efforts to obtain any
     acknowledgements from the obligors under any instruments securing or
     purporting to secure the Existing Loans reasonably requested by Hanover to
     confirm the status of such instruments and verify the rights of Hanover.
     Makers also hereby authorize Hanover to execute on behalf of Makers, as
     debtor, and to file financing statements necessary or desirable in
     Hanover's sole discretion to perfect and to maintain the perfection and
     priority of Hanover's security interest in the collateral securing or
     purporting to secure the Existing Loans. Without limiting the foregoing,
     Makers agree that within five (5) business days after Hanover presents
     initial drafts to McGhan, Makers will properly execute, acknowledge and
     deliver to Hanover such deeds of trust and security agreements as Hanover
     shall reasonably require to grant Hanover valid and perfected deed of trust
     lien and security interest in the real property purported to be covered by
     the McGhan Deed of Trust.

7.   Release and Waiver by McGhan. In partial exchange for the agreements of
     Hanover contained herein, McGhan, on behalf of himself, his heirs,
     executors, successors, administrators and assigns and subject to the
     provisions set forth below in this Paragraph 7, does hereby knowingly and
     voluntarily release, acquit and forever discharge Hanover, its officers,
     shareholders, employees, directors, attorneys, subscribers, parent
     companies, subsidiaries, affiliates, successors and assigns (collectively,
     the "Hanover Parties") from any and all claims, charges, complaints,
     grievances or promises of any and every kind, whether known or unknown,
     that are based upon facts occurring prior to the Effective Date of this
     Agreement, including but not limited to, the following: (a) any contractual
     claims arising under any written or oral agreements between McGhan and
     Hanover Entities, (b) any statutory claims under the Age Discrimination in
     Employment Act of 1967, the Americans with Disabilities Act of 1990, the
     Family and Medical Leave Act of 1993, the Civil Rights Acts of 1964 and
     1991, the Employee Retirement Income Security Act, Chapter 451 of the Texas
     Labor Code, the Texas Payday Law, and/or the Texas Commission on Human
     Rights Act, or arising from any federal, state, or local statute, ordinance
     or regulation, (c) any tort or contract claims, (d) any claims, matters or
     actions related to McGhan's employment and/or affiliation with, or
     separation from Hanover. It is further agreed that, in the event Hanover
     initiates any claim, charge, complaint or grievance by Hanover against
     McGhan, other than a claim, charge, complaint or grievance regarding the
     obligations of McGhan or Makers under (a) this Agreement, (b) any of the
     Existing Loans, (c) the 2002 Stock Pledge Agreements or (d) any other
     instruments securing or executing in connection with the Existing Loans,
     the foregoing release of claims by McGhan shall be extinguished and no
     longer in effect to the extent necessary to defend or respond to such
     claim, charge, complaint or grievance, including any counterclaims, cross
     claims, demands or other actions. The above notwithstanding, it is
     expressly agreed that McGhan is not releasing and does not release or waive
     any right to (i) indemnification from any of the Hanover Entities, to the
     extent he is entitled to such indemnification under Delaware or applicable
     law, or the bylaws, charters or

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     partnership agreements of the Hanover Entities and (ii) from the D&O
     insurance carrier to the extent the McGhan is determined to be entitled to
     the benefits offered under any directors and officers insurance policy
     maintained by any of the Hanover Entities. In addition, Hanover agrees that
     attorneys' fees and expenses incurred by McGhan in defending civil or
     criminal actions as provided for under Section 7.1 of Hanover's bylaws
     (including proceedings prosecuted by the United States Securities and
     Exchange Commission) shall be advanced to McGhan; provided that McGhan's
     signature on this Agreement shall constitute an undertaking to reimburse
     such expenses as provided for in Section 7.1 of Hanover's bylaws.

8.   Confidential Information. McGhan acknowledges that in the course of
     McGhan's employment by Hanover, McGhan had access to information relating
     to the business and affairs of the Hanover Entities, including, without
     limitation, trade secrets, designs, technology, processes, data,
     techniques, inventions (whether patentable or not), works of authorship,
     formulas, business and development plans, customer lists, software programs
     and subroutines, source and object code, algorithms, terms of compensation
     and personnel assessments of the Hanover Entities' employees, information
     regarding the Hanover Entities' facilities, processes, operating
     procedures, financial data, purchasing practices, marketing, management
     procedures, books and records, employee or personnel data, contractual
     arrangements or proposals, properties and business affairs of the Hanover
     Entities, as well as the Hanover Entities' business plans and budgets,
     information concerning the Hanover Entities' actual or anticipated
     business, research or development, and may have received information in
     confidence by or for any of the Hanover Entities from any other person
     (collectively "Confidential Information"). McGhan agrees that following the
     Effective Date, McGhan will not, at any time, directly or indirectly, for
     any reason whatsoever, with or without cause, unless pursuant to a lawful
     subpoena, disclose or disseminate any Confidential Information to any
     person or entity, nor will McGhan use any Confidential Information in
     competing with any of the Hanover Entities for any purpose. It is expressly
     understood that the Confidential Information covered by this paragraph
     includes only information that is confidential or proprietary information
     of one or more of the Hanover Entities and therefore does not include
     information which is available to the public. This provision may be
     specifically enforced by Hanover through an action at law or in equity at
     any time Hanover deems necessary.

9.   Non-Competition. As partial exchange for the consideration referred to
     herein and in further consideration of the payment by Hanover to McGhan of
     $33,333.33 per month for a period of eighteen (18) months and pursuant to
     McGhan's recognition that a material part of Hanover's willingness to enter
     into this Agreement centers upon its concern that a breach of this
     Paragraph 9 by McGhan would materially damage the Hanover Entities, McGhan
     further agrees that from the Effective Date up to and including a two (2)
     year period following the Effective Date of this Agreement, McGhan will
     not, either directly or indirectly, for himself or on behalf of any other
     person, persons, company, partnership, corporation or business of whatever
     nature:

          a. except for the Permitted Activities (as defined below), engage in,
          carry on, or have a financial interest in (in any capacity whatsoever,
          including, without limitation, as an officer, director, shareholder,
          owner, partner, joint venturer,

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         manager, advisor, employee, independent contractor or consultant) the
         Applicable Businesses (as defined below) anywhere except Asia, due to
         the broad geographic nature of the Hanover Entities' business or
         otherwise compete with the Hanover Entities in the Applicable
         Businesses;

         b. employ any employee, consultant or independent contractor of any of
         Hanover, or solicit or call upon any person or entity who is, at that
         time, an employee, consultant or independent contractor of any of the
         Hanover Entities, for the purpose of or with the intent or effect of
         employing, contracting for services, or enticing such employee,
         independent contractor or consultant away from or out of the employ or
         contract with any of the Hanover Entities, whether through a Qualified
         Investment or otherwise, or

         c. call upon any person or entity which is, at that time, or which has
         been within one (1) year prior to that time, a customer of any of the
         Hanover entities for the purpose of proposing a Qualified Investment or
         soliciting, selling, leasing or outsourcing management of services or
         products relating to the Applicable Businesses anywhere except Asia.

     As referenced above, the "Applicable Businesses" will mean the hydrocarbon
     compression and hydrocarbon processing, treating, parts and services and
     production equipment businesses conducted by any of the Hanover Entities.

     Notwithstanding anything in subparagraph (a) of this Paragraph 9 to the
     contrary, McGhan may (i) acquire, for investment purposes only, not more
     than two percent (2%) of the capital stock of a business competing with
     Hanover, provided that such stock is traded on a national securities
     exchange, an automated quotation system, or over-the-counter, or (ii) after
     offering a Qualified Investment (as defined below) to HCC pursuant to the
     procedures set forth in this Paragraph 9, make a Qualified Investment (the
     activities described in clauses (i) and (ii) being collectively referred to
     as the "Permitted Activities").

     If, from the Effective Date up to and including the last day of the
     twenty-four (24) month period following the Effective Date of this
     Agreement, McGhan desires to make a Qualified Investment, McGhan shall give
     written notice to HCC at least thirty (30) days prior to the proposed date
     such Qualified Investment is to be consummated by McGhan (the "First
     Notice"). The First Notice shall contain a detailed description of the
     terms and timing of such Qualified Investment, the dollar amount of such
     Qualified Investment, and contact information for representatives of the
     entity or business in which such Qualified Investment is to be made, and
     shall be accompanied by written authorization from the Qualified Entity (as
     defined below) offering the Qualified Investment to Hanover in lieu of
     McGhan. McGhan hereby consents to HCC's contact with such representatives
     to the extent deemed necessary by HCC for its evaluation of the Qualified
     Investment. HCC shall have ten (10) days from the date of its receipt of
     the First Notice to notify McGhan in writing of Hanover's intention to make
     the Qualified Investment in lieu of McGhan making such investment (the
     "First Acceptance Notice"). If HCC shall deliver a First Acceptance

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     Notice to McGhan, the Qualified Investment shall not be considered a
     Permitted Activity, and McGhan hereby consents to Hanover's negotiation and
     consummation of such Qualified Investment on behalf of itself. If, however,
     HCC does not deliver an First Acceptance Notice within such ten (10)-day
     period, McGhan may continue to negotiate the terms of such Qualified
     Investment and shall give a second written notice to HCC (directed to the
     attention of the CEO office at least ten (10) days prior to the proposed
     date such Qualified Investment is to be consummated by McGhan (the "Second
     Notice"). The Second Notice shall contain updated versions of the
     information contained in the First Notice. HCC shall have five (5) days
     from the date of its receipt of the Second Notice to notify McGhan in
     writing of Hanover's intention to make the Qualified Investment in lieu of
     McGhan making such investment (the "Second Acceptance Notice"). If HCC
     shall deliver a Second Acceptance Notice to McGhan, the Qualified
     Investment shall not be considered a Permitted Activity, and McGhan hereby
     consents to Hanover's negotiation and consummation of such Qualified
     Investment behalf of itself. If, however, HCC shall not have delivered
     either a First Acceptance Notice within the ten (10)-day period described
     herein or a Second Acceptance Notice with the five (5)-day period described
     herein, the Qualified Investment shall be considered a Permitted Activity
     so long as it shall be consummated by McGhan under substantially the same
     terms as such Qualified Investment was presented to HCC on the proposed
     consummation date as stated in the Second Notice or within five (5) days
     thereafter (the "Deadline"). Any Qualified Investment not consummated by
     the McGhan on or prior to the Deadline shall not be considered a Permitted
     Investment unless re-offered to Hanover in accordance with the procedures
     specified in this Paragraph 9.

     For purposes of this Agreement, the term (i) "Qualified Investment" shall
     mean a passive investment, whether as a shareholder, limited partner,
     member, or other owner, in a Qualified Entity, and (ii) "Qualified Entity"
     shall mean any entity or business that (a) competes with any Hanover Entity
     anywhere, and (b) with respect to which (or its subsidiaries or
     affiliates), McGhan has no employment, consulting, contractor or management
     relationship.

     Should McGhan fail to perform any provision of this Agreement, including
     this Paragraph 9, then the payments provided for under this Paragraph 9
     shall cease immediately. Notwithstanding the foregoing, Hanover agrees that
     prior to exercising the foregoing right to cease such payments on the basis
     of McGhan's perceived failure to perform any provision of this Agreement or
     instituting any proceedings for injunctive relief for such failure by
     McGhan, Hanover will first deliver written notice of such failure to McGhan
     and make reasonable efforts to have a senior officer of HCC meet with
     McGhan to discuss any alleged violation during the seven (7) day period
     immediately following the delivery of such notice. In the event at the
     expiration of such seven (7) day period Hanover still believes that McGhan
     has failed to perform any provisions of this Agreement, Hanover shall not
     be limited in exercising any rights available to Hanover for such failure,
     whether arising under this Agreement, at law or in equity.

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10.  Injunctive Relief. It is agreed by the parties that the foregoing covenants
     in Paragraph 9 impose a reasonable restraint on the McGhan in light of the
     activities and business of Hanover on the date of the execution of this
     Agreement. All of the covenants in Paragraph 9 shall be construed as an
     agreement independent of any other provision in this Agreement or any other
     relationship or dealings between the parties. Because of the difficulty of
     measuring economic losses to Hanover as a result of a breach of any
     covenant in Paragraph 9 above, and because of the immediate and irreparable
     damage that could be caused to Hanover for which they would have no other
     adequate remedy, McGhan agrees that in the event of an alleged breach by
     McGhan, the foregoing covenants may be enforced by Hanover by injunctions,
     restraining orders and other equitable actions.

11.  Cooperation. McGhan agrees that he will act at all times hereafter in a
     manner consistent with the interests of Hanover with respect to their
     shareholders, customers, employees, agents, and lenders. Neither McGhan nor
     Hanover will defame or disparage each other. McGhan further agrees that he
     will provide reasonable cooperation to Hanover in response to reasonable
     requests made by Hanover in matters relating to internal investigations,
     external investigations, and/or judicial or administrative proceedings,
     including but not limited to, participating upon reasonable notice in
     conferences and meetings, making himself available upon reasonable notice
     of reasonable times for interviews, providing non-privileged documents or
     information, aiding in the analysis of documents, or complying with any
     other reasonable requests by Hanover including execution of such agreements
     as are reasonably necessary. Nothing in this paragraph is intended to
     constitute or be construed as a waiver of the attorney-client privilege or
     any other privileges that McGhan may be entitled to assert. This
     cooperation is an integral part of this Agreement. Hanover agrees that it
     will provide reasonable cooperation to McGhan in response to reasonable
     requests by McGhan in matters relating to internal investigations, external
     investigations, and/or judicial or administrative proceedings arising out
     of or relating in any way to any fact related to McGhan as an officer or
     director of Hanover which occurred prior to the Effective Date of this
     Agreement, including but not limited to providing non-privileged documents
     or information, aiding in the analysis of documents or complying with any
     other reasonable requests by McGhan.

12.  Indemnification of Hanover. McGhan agrees to pay federal and state taxes,
     if any, that he is required by law to pay with respect to this Agreement.
     If McGhan fails to pay any required taxes with respect to this Agreement,
     McGhan agrees to indemnify and hold Hanover harmless from any claims,
     demands, deficiencies, levies, assessments, penalties or recoveries by any
     government or entity against McGhan for any amounts claimed due on account
     of McGhan's failure to pay any required taxes with respect to the amounts
     designated in this Agreement, including Hanover's reasonable attorneys'
     fees in any disputes related to those payments.

13.  Consulting Services. For a period thirty-six (36) months from the Effective
     Date, the McGhan agrees to provide reasonable consulting services to
     Hanover that do not materially interfere with McGhan's business activities
     (the "Consulting Services"). McGhan shall provide the consulting services
     at the direction of the Chairman of the Board of Directors of Hanover.
     McGhan will be an independent contractor and is not authorized to represent
     any of the Hanover Parties. The McGhan shall be entitled to cease providing
     Consulting Services to Hanover by giving Hanover thirty (30) days prior
     written notice. In consideration for the

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     McGhan's agreement to provide Consulting Services, Hanover shall provide
     health and medical benefits to the McGhan and his family on a basis (and at
     a cost) substantially similar to those benefits provided to Hanover's
     employees. At such time as McGhan elects to terminate McGhan's obligations
     to provide Consulting Services, Hanover shall cease providing such health
     and medical benefits.

14.  Acknowledgement. McGhan and Hanover acknowledge, represent and agree that
     they have been fully informed and are fully aware of their rights to
     discuss any and all aspects of this matter with an attorney of choice, that
     they have carefully read and fully understands all of the provisions of
     this Agreement, and that they accept the terms of this Agreement as fair
     and equitable under all the circumstances and voluntarily execute this
     Agreement.

15.  Non-Admission. This Agreement is not an admission by McGhan or Hanover of
     any wrongdoing or liability.

16.  No Future Employment. McGhan agrees to waive any right to reinstatement or
     future employment with any of the Hanover Entities following the Effective
     Date.

17.  Entire Agreement. This Agreement sets forth the entire Agreement between
     McGhan and Hanover. Further, it supercedes and extinguishes any prior
     understandings or written or oral agreements between the parties. No one
     has promised McGhan or Hanover anything that is different from what is set
     forth in this Agreement. No other promises or agreements shall be binding
     upon McGhan or Hanover with respect to the subject matter of this Agreement
     unless separately agreed to in writing.

18.  Assignment. This Agreement and all the provisions hereof shall be binding
     upon and inure to the benefit of the parties hereto and their respective
     successors, heirs, legal representatives and assigns, but neither this
     Agreement nor any of the rights, interests, or obligations hereunder shall
     be assigned by either of the parties hereto without the prior written
     consent of the other party.

19.  Controlling Law. This Agreement has been made in the State of Texas and
     Texas law applies to it. If any part is found to be invalid, the remaining
     parts of the Agreement will remain in effect as if there were no invalid
     part. Any suit, action or proceeding against any party to this Agreement
     shall be brought in any federal or state court located in the City of
     Houston, Texas, and each party hereby submits to the nonexclusive
     jurisdiction of such courts for the purpose of any such suit, action or
     proceeding. McGhan and Hanover agree that this Agreement is intended to,
     and in all respects should be interpreted and enforced in a manner that
     renders it consistent with, and in no manner in violation of, the
     Sarbanes-Oxley Act of 2002.

20.  Miscellaneous. McGhan agrees that, except as provided by this Agreement, he
     is not entitled to any income, payments, salaries, or other financial
     benefits from any of Hanover.

21.  Notices. Except as otherwise specifically provided herein, notices and
     other communications provided for herein shall be in writing and shall be
     hand delivered or mailed;

                                       10

<PAGE>

     If to Hanover:                              With a Copy to:

     Hanover Compressor Company                  Hanover Compressor Company
     12000 N. Houston Rosslyn                    12000 N. Houston Rosslyn
     Houston, Texas 77086                        Houston, Texas 77086
     Attention:  Chief Executive Officer         Attention:  General Counsel

     If to McGhan:                               With a Copy to:

     Michael J. McGhan                           Eric J.R. Nichols
                                                 Beck, Redden & Secrest, L.L.P.
     --------------------------
     Houston, Texas                              1221 McKinney, Suite 4500
                    -----------
                                                 Houston, Texas 77010

22.  Ruth McGhan has joined in the execution of this Agreement for purposes of
     evidencing her agreement to the terms of Paragraphs 6, 17, 18, 19 and 20.

                                       11

<PAGE>

                                            HANOVER COMPRESSOR COMPANY
/s/ Michael J. McGhan
-----------------------------------         By: /s/ Victor E. Grijalva
Michael J. McGhan                               --------------------------------
                                                [name]  Victor E. Grijalva
/s/ Ruth Lynn McGhan                            [title] President & Chief
-----------------------------------                     Executive Officer
Ruth McGhan

Date:  8/2/02                               Date:  8/5/02
     -----------------                           -------------

                                            HANOVER COMPRESSION LIMITED
                                            PARTNERSHIP

                                            By: /s/ John E. Jackson
                                                --------------------------------
                                                [name]  John E. Jackson

                                                [title] Chief Financial Officer

                                            Date:  8/5/02
                                                 -------------

                                            It is represented that the
                                            individual(s) signing above on
                                            behalf of Hanover Compressor Company
                                            and Hanover Compression Limited
                                            Partnership have full authorization
                                            to do so.

                                       12<PAGE>

                                                                   Exhibit 10.78

                              SEPARATION AGREEMENT

     This agreement ("Agreement") is made among Charles D. Erwin, an individual
residing in Houston, Texas ("Erwin"), Hanover Compressor Company, a Delaware
corporation ("HCC"), and Hanover Compression Limited Partnership ("Hanover
Compression," and together with HCC, "Hanover") following significant
negotiation by both parties, fully represented by counsel.

     For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Hanover and Erwin, intending to be legally bound,
hereby agree as follows:

1.   Effective Date. The Agreement will become final, binding and enforceable as
     of the Effective Date (as hereafter defined).

2.   Termination of Employment. Each of Hanover and Erwin has determined that it
     is in their respective best interest to sever their relationship, including
     his employment relationship with Hanover. In exchange for the waiver and
     release and other substantial promises by Erwin contained herein, Hanover
     agrees that Erwin may resign from employment, and Erwin hereby resigns from
     all positions he holds as an employee, agent, representative, officer,
     and/or director of HCC its subsidiaries and affiliates, and any entity in
     which HCC may hold directly, or indirectly, any interest (collectively, the
     "Hanover Entities") effective August 2, 2002 (the "Effective Date"). In
     connection with the foregoing, Erwin agrees that he will execute such
     resignation letters and other similar documents as Hanover may reasonably
     require in connection with the foregoing.

3.   Payments to Erwin. In further exchange for the waiver and release and other
     substantial promises by Erwin contained herein, Hanover agrees as follows:

         a. Within three (3) business days after the Effective Date, Hanover
         will deliver to Erwin a final paycheck for all wages earned through the
         Effective Date, plus any accrued but unused vacation, less any and all
         customary and usual deductions or withholdings.

         b. Within thirty (30) days after the Effective Date, Hanover will
         reimburse Erwin for all necessary and reasonable expenses that Erwin
         has incurred on behalf of the Hanover Entities prior to the Effective
         Date, according to the standard policies and procedures of Hanover
         regarding reimbursement of such expenses. Further, Hanover will
         reimburse Erwin or pay directly for Erwin's reasonable attorney's fees
         incurred with respect to the negotiation and execution of this
         Agreement.

         c. Hanover's Houstonian membership which Erwin has been using will be
         assigned from Hanover to Erwin, without charge, and Hanover shall pay
         any remaining balance on the initiation fee. Erwin shall be responsible
         for all dues and expenses relating thereto from and after the Effective
         Date.

                                       Page 1 of 11

<PAGE>

         d. Except as otherwise specifically provided in this Agreement, Erwin
         will not be eligible to participate in or accumulate any credit under
         the provisions of any retirement plan, the vacation policy, or any
         other employee benefit plan or policy of Hanover from and after the
         Effective Date. No further bonus will be paid to Erwin under any bonus
         plan or policy.

4.   Stock Options. It is expressly agreed that Erwin may exercise any
     unexercised vested outstanding options ("Stock Options") granted pursuant
     to any of HCC's various stock option plans and stock option agreements
     between Erwin and HCC (such stock option plans and stock option agreements
     being herein collectively referred to as the "Stock Option Agreements"),
     but only in accordance with the terms and provisions of the operative Stock
     Option Agreement, including those provisions relating to termination of
     employment; provided, however, that such Stock Option Agreements shall not
     be construed to forfeit any vested Stock Options upon termination of
     employment but shall allow the exercise of such Stock Options in accordance
     with the post-termination exercise period associated with voluntary
     departure set forth in the applicable Stock Option Agreement.

     Stock Options that have not vested before the Effective Date shall be
     forfeited. No further awards, accruals, vesting, or payments of any kind
     will be made to Erwin for any plan year. In connection with any exercise of
     any Stock Options, Erwin shall first fully satisfy and fund HCC's federal
     income tax withholding obligations, if any, that may arise in connection
     with Erwin's exercise of such Stock Option and any related requirement
     under the operative Stock Option Agreement. In addition, Erwin agrees that
     in connection with each exercise of any Stock Option, Erwin will
     immediately deliver the certificates evidencing the resulting shares of
     stock (the "Option Shares") to HCC in freely transferable form as
     collateral for the repayment of the Existing Loans (as defined below)
     together with such stock powers, financing statements and security
     agreements as HCC shall reasonably require to evidence and perfect a first
     priority security interest in the Option Shares and (ii) within five (5)
     business days after the Effective Date, Erwin will execute and deliver to
     HCC such security agreements and financing statements as HCC shall
     reasonably require to evidence and perfect a first priority security
     interest in any Option Shares that have been, or may in the future be,
     issued pursuant to the Stock Options (collectively the "2002 Stock Pledge
     Agreements"). All Option Shares shall secure the Existing Loan pursuant to
     the terms of the 2002 Stock Pledge Agreements and on terms consistent with
     this Agreement. The 2002 Stock Pledge Agreements shall include provisions
     that allow or require, as indicated below, the sale of all or a portion of
     the Option Shares covered thereby only after fifteen (15) business days
     after notice to Erwin so as to allow him time to provide additional
     adequate collateral as required and the resulting proceeds shall be applied
     as follows in the following order of priority:

         a. First, at the time of the last exercise (or lapse, if earlier) of
         the foregoing Stock Options, a determination shall be made of the
         federal income taxes that will accrue (at the maximum marginal federal
         income tax rate for the year 2002 for individuals filing jointly) as a
         result of the grant and exercise of the foregoing Stock Options (less
         the amount of required federal income tax withholding by HCC) and a
         number of Option Shares having a market value at such time equal to the
         amount of such taxes, plus cost of sale, shall be released from the
         2002 Stock Pledge Agreements and delivered to Erwin; and

                                       Page 2 of 11

<PAGE>

         b. Second, at Erwin's option, the remaining Option Shares may be sold
         and the resulting proceeds, less actual cost of sale, shall be
         delivered to HCC as substitute cash collateral for the repayment of for
         the Existing Loan and deposited by HCC into an interest bearing
         depository account under the control of HCC (such sums being referred
         to herein as the "Cash Collateral").

     In addition, the 2002 Stock Pledge Agreements shall provide that (i) for
     purposes of the ratio test contained in Paragraph 4 of the 2000 Pledge
     Agreement (as hereafter defined), the Option Shares covered by the 2002
     Stock Pledge Agreements shall be considered Pledged Securities (as defined
     in such Paragraph 4) covered by the 2000 Pledge Agreement (ii) in the event
     Erwin is ever required pursuant to such Paragraph 4 to deliver additional
     Pledged Securities, Erwin shall have twenty (20) days after delivery of
     notice thereof from Hanover in which to satisfy such requirement, and,
     (iii) Erwin shall be entitled to a release from the 2002 Stock Pledge
     Agreements of any Option Shares covered by the 2002 Stock Pledge Agreements
     in excess of the number of Option Shares necessary to satisfy the ratio
     test contained in Paragraph 4 of the 2000 Pledge Agreement, after taking
     into account the number of shares of HCC then covered by the 2000 Pledge
     Agreement. The "2000 Pledge Agreement" will mean that certain Pledge
     Agreement dated June 29, 2000 executed by Erwin in favor of Hanover
     Compression.

5.   Return of Company Materials. Except as otherwise provided herein, no
     equipment or materials shall be transferred to Erwin from Hanover. Erwin
     must, on or prior to the Effective Date, return or relinquish all Hanover
     credit cards, computers (including all files saved thereon), office space,
     equipment, files, books, and other company equipment, materials, or
     property in his possession, except all furniture and accessories in his
     office may be taken by Erwin at no charge within thirty (30) days after the
     Effective Date.

6.   Payments to Hanover. In partial exchange for the substantial promises by
     Hanover contained herein, Erwin agrees as follows with respect to the loan
     evidenced by the following described Promissory Note (the "Existing Loan"):

     Four Year Secured Promissory Note dated June 29, 2000 executed by Erwin and
     payable to the order of HCC in the original principal amount of $824,087.08
     as therein provided.

         6.1 Status of Existing Loan. With respect to the Existing Loan, the
     parties agree that the unpaid principal amount of the Existing Loan, as of
     the Effective Date, is equal to $583,692. Erwin represents and warrants to
     Hanover that (i) Erwin does not have any right of offset or setoff against
     the payment of the Existing Loan or any defenses to payment of the Existing
     Loan and (ii) the Promissory Note evidencing such Existing Loan, as
     described above, has not been modified or amended, represents the entire
     agreement between Erwin and Hanover Compression concerning such Existing
     Loan, is in full force and effect, is a valid and subsisting obligation of
     Erwin and is enforceable in accordance with its terms.

          6.2. Further Assurances. Erwin agrees that Erwin shall promptly
     execute and deliver all further agreements, and take all further action,
     that may be reasonably necessary or that Hanover may reasonably request, in
     order to further evidence the Existing Loan and/or the liens, security
     interests, and assignments granted or purported to be granted as security
     for

                                       Page 3 of 11

<PAGE>

     the Existing Loan and perfect and protect the same or to enable Hanover to
     exercise and enforce Hanover's rights and remedies thereunder. Without
     limiting the foregoing, Erwin shall at Hanover's reasonable request: (i)
     execute security agreements, financing statements, amendments and
     continuations of financing statements, assignments, notices, and such other
     documents and agreements as Hanover may reasonably request in order to
     perfect and preserve the liens and security interests granted or purported
     to be granted as security for the Existing Loan and (ii) use reasonable
     efforts to obtain any acknowledgements from the obligors under any
     instruments securing or purporting to secure the Existing Loan reasonably
     requested by Hanover to confirm the status of such instruments and verify
     the rights of Hanover. Erwin also hereby authorizes Hanover to execute on
     behalf of Erwin, as debtor, and to file financing statements necessary or
     desirable in Hanover's sole discretion to perfect and to maintain the
     perfection and priority of Hanover's security interest in the collateral
     securing or purporting to secure the Existing Loan.

7.   Release and Waiver by Erwin. In partial exchange for the consideration
     referred to herein, Erwin, on behalf of himself, his heirs, executors,
     successors, administrators and assigns (collectively, "Erwin Parties"),
     does hereby knowingly and voluntarily release, acquit and forever discharge
     Hanover, its officers, shareholders, employees, directors, attorneys,
     subscribers, parent companies, subsidiaries, affiliates, successors and
     assigns and any other entity in which HCC owns, directly or indirectly, an
     interest (collectively, the "Hanover Parties") from any and all claims,
     charges, complaints, grievances or promises of any and every kind, whether
     known or unknown, that are based upon facts occurring prior to the
     Effective Date of this Agreement, including but not limited to, the
     following: (a) any contractual claims arising under any written or oral
     agreements between Erwin and Hanover Entities, (b) any statutory claims
     under the Age Discrimination in Employment Act of 1967, the Americans with
     Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the
     Civil Rights Acts of 1964 and 1991, the Employee Retirement Income Security
     Act, Chapter 451 of the Texas Labor Code, the Texas Payday Law, and/or the
     Texas Commission on Human Rights Act, or arising from any other federal,
     state, or local statute, ordinance or regulation, (c) any tort or contract
     claims, (d) any claims, matters or actions related to Erwin's employment
     and/or affiliation with or separation from Hanover. It is further agreed
     that, in the event that Hanover initiates any claim, charge, complaint or
     grievance against Erwin other than a complaint arising from an alleged
     violation of Paragraph 6 or 9 hereof then the foregoing release of claims
     by Erwin shall be extinguished and no longer be in effect to the extent
     necessary to defend or respond to such claim, charge, complaint or
     grievance, including any counter claims, cross claims, demands or other
     actions in any way relating to such claim, charge, complaint or grievance.
     The above notwithstanding, it is expressly agreed that Erwin is not
     releasing and does not release any right to indemnification from HCC (i) to
     the extent he is determined to be entitled to such indemnification by HCC
     under Delaware or applicable law, or the bylaws or charter of HCC, and (ii)
     to the extent Erwin is determined to be entitled to the benefits offered
     under any directors and officers insurance policy maintained by HCC. In
     addition, Hanover agrees that expenses incurred by Erwin in defending civil
     or criminal actions as provided for under Section 7.1 of HCC's bylaws
     (including proceedings prosecuted by the United States Securities and
     Exchange Commission) shall be advanced to Erwin; provided, that Erwin's
     signature on this Agreement shall constitute an undertaking to reimburse
     such expenses as provided for in Section 7.1 of HCC's bylaws.

                                       Page 4 of 11

<PAGE>

8.   Confidential Information. Erwin acknowledges that in the course of Erwin's
     employment by Hanover, Erwin had access to information relating to the
     business and affairs of the Hanover Entities, including, without
     limitation, trade secrets, designs, technology, know-how, processes, data,
     ideas, techniques, inventions (whether patentable or not), works of
     authorship, formulas, business and development plans, customer lists,
     software programs and subroutines, source and object code, algorithms,
     terms of compensation and performance levels of the Hanover Entities'
     employees, information regarding the Hanover Entities' facilities,
     processes, operating procedures, financial data, purchasing practices,
     marketing, management procedures, books and records, employee or personnel
     data, contractual arrangements or proposals, properties and affairs of the
     Hanover Entities, as well as their business plans and budgets, information
     concerning the Hanover Entities' actual or anticipated business, research
     or development, and may have received information in confidence by or for
     the Hanover Entities' from any other person (collectively "Confidential
     Information"). Erwin agrees that following the Effective Date, Erwin will
     not, at any time, directly or indirectly, for any reason whatsoever, with
     or without cause, unless pursuant to a lawful subpoena or other legal
     process, breach the confidentiality of the information by using,
     disseminating, or disclosing any of the Hanover Entities' Confidential
     Information to any person or entity, nor will Erwin use any Confidential
     Information in competing with any of the Hanover Entities for any purpose.
     It is expressly understood that the Confidential Information covered by
     this paragraph includes only information that is confidential or
     proprietary information of one or more of the Hanover Entities and
     therefore does not include information which is generally available now or
     hereafter to the public. This provision may be specifically enforced by
     Hanover through an action at law or in equity at any time Hanover deems
     necessary.

9.   Non-Competition. As partial exchange for the consideration referred to
     herein and in further consideration of the payment to Erwin of $20,611.11
     per month for a period of eighteen (18) consecutive months beginning on the
     first day of each month beginning August 1, 2002 (provided, however, that
     the payment due August 1, 2002 shall be paid on August 5, 2002) and
     pursuant to Erwin's recognition that a material part of Hanover's
     willingness to enter into this Agreement centers upon its concern that a
     breach of this Paragraph 9 by Erwin would materially damage the Hanover
     Entities, Erwin further agrees that from the Effective Date up to and
     including a twenty-four (24) month period following the Effective Date of
     this Agreement, Erwin will not, either directly or indirectly, for himself
     or on behalf of any other person, persons, company, partnership,
     corporation or business of whatever nature:

          a. except for the Permitted Activities (as defined below), engage in,
          carry on, or have a financial interest (in any capacity whatsoever,
          including, without limitation, as an officer, director, shareholder,
          owner, partner, joint venturer, manager, advisor, employee,
          independent contractor or consultant) in the Applicable Businesses (as
          defined below) anywhere except Asia, due to the broad geographic
          nature of the Hanover Entities' business or otherwise compete with the
          Hanover Entities in the Applicable Business;

          b. in any capacity whatsoever, employ any employee or consultant of
          any of the Hanover Entities, or solicit or call upon any person or
          entity, who is in either

                                       Page 5 of 11

<PAGE>

         instance, at that time, an employee or consultant of any of the Hanover
         Entities, for the purpose of or with the intent or effect of employing,
         contracting for services, or enticing such employee or consultant away
         from or out of the employ or contract with any of the Hanover Entities,
         whether through a Qualified Investment or otherwise; or

         c. in any capacity whatsoever, call upon any person or entity which is,
         at that time, or which has been within twenty-four (24) months prior to
         that time, a customer of any of the Hanover Entities for the purpose of
         soliciting, selling, leasing or management of services or products
         relating to the Applicable Businesses anywhere.

     As referenced above, the "Applicable Businesses" will mean the compression
     processing, treating, parts and services, and production equipment
     businesses conducted by Hanover as its primary businesses prior to the
     Effective Date.

     Notwithstanding anything in subparagraph (a) of this Paragraph 9 to the
     contrary: (i) Erwin may acquire, for investment purposes only, not more
     than two percent (2%) of the capital stock of a business competing with
     Hanover, provided that such stock is traded on a national securities
     exchange, an automated quotation system, or over-the-counter, (ii) Erwin
     may secure employment in the energy industry with a company that does not
     compete as a third party service provider, lessor, or vendor in the
     Applicable Businesses or (iii) after offering a Qualified Investment (as
     defined below) to HCC pursuant to the procedures set forth in this
     Paragraph 9, make a Qualified Investment (the activities described in
     clauses (i) (ii) and (iii) being collectively referred to as the "Permitted
     Activities").

     If, from the Effective Date up to and including the last day of the
     twenty-four (24) month period following the Effective Date of this
     Agreement, Erwin desires to make a Qualified Investment, Erwin shall give
     written notice to HCC at least thirty (30) days prior to the proposed date
     such Qualified Investment is to be consummated by Erwin (the "First
     Notice"). The First Notice shall contain a detailed description of the
     terms and timing of such Qualified Investment, the dollar amount of such
     Qualified Investment, and contact information for representatives of the
     entity or business in which such Qualified Investment is to be made, and
     shall be accompanied by written authorization from the Qualified Entity (as
     defined below) offering the Qualified Investment to Hanover in lieu of
     Erwin. Erwin hereby consents to HCC's contact with such representatives to
     the extent deemed necessary by HCC for its evaluation of the Qualified
     Investment. HCC shall have ten (10) days from the date of its receipt of
     the First Notice to notify Erwin in writing of Hanover's intention to make
     the Qualified Investment in lieu of Erwin making such investment (the
     "First Acceptance Notice"). If HCC shall deliver a First Acceptance Notice
     to Erwin, the Qualified Investment shall not be considered a Permitted
     Activity, and Erwin hereby consents to Hanover's negotiation and
     consummation of such Qualified Investment on behalf of itself. If, however,
     HCC does not deliver an First Acceptance Notice within such ten (10)-day
     period, Erwin may continue to negotiate the terms of such Qualified
     Investment and shall give a second written notice to HCC at least ten (10)
     days prior to the proposed date such Qualified Investment is to be
     consummated by Erwin (the "Second Notice"). The Second Notice shall contain
     updated versions of the information contained in the First Notice. HCC

                                       Page 6 of 11

<PAGE>

     shall have five (5) days from the date of its receipt of the Second Notice
     to notify Erwin in writing of Hanover's intention to make the Qualified
     Investment in lieu of Erwin making such investment (the "Second Acceptance
     Notice"). If HCC shall deliver a Second Acceptance Notice to Erwin, the
     Qualified Investment shall not be considered a Permitted Activity, and
     Erwin hereby consents to Hanover's negotiation and consummation of such
     Qualified Investment behalf of itself. If, however, HCC shall not have
     delivered either a First Acceptance Notice within the ten (10)-day period
     described herein or a Second Acceptance Notice with the five (5)-day period
     described herein, the Qualified Investment shall be considered a Permitted
     Activity so long as it shall be consummated by Erwin under substantially
     the same terms as such Qualified Investment was presented to HCC on the
     proposed consummation date as stated in the Second Notice or within five
     (5) days thereafter (the "Deadline"). Any Qualified Investment not
     consummated by Erwin on or prior to the Deadline shall not be considered a
     Permitted Investment unless re-offered to Hanover in accordance with the
     procedures specified in this Paragraph 9.

     For purposes of this Agreement, the term (i) "Qualified Investment" shall
     mean an investment, whether as a shareholder, limited partner, member, or
     other owner, in a Qualified Entity, and (ii) "Qualified Entity" shall mean
     any entity or business that (a) competes with Hanover anywhere and (b) with
     respect to which (or with respect to its subsidiaries or affiliates), Erwin
     has no employment, consulting, contractor or management relationship.

     If, during the twenty-four (24) month period following the Effective Date,
     HCC consummates a Qualified Investment or purchases or sells any assets or
     businesses as a result of a Proposal presented by Erwin and accepted in
     writing by HCC, then HCC agrees to pay Erwin the Finder's Fee agreed to by
     HCC and Erwin for such Qualified Investment, purchase or sale. As
     referenced herein, (a) a "Proposal" means a detailed written proposal
     presented by Erwin to the Chief Executive Officer of HCC for a Qualified
     Investment, purchase or sale; and (b) a "Finder's Fee" means a reasonable
     and customary fee paid to third party agents in the industry for an
     opportunity similar to the applicable Qualified Investment, purchase or
     sale, which fee must be specified in a written agreement executed by Erwin
     and HCC. At such time that Erwin presents a Proposal to HCC, and HCC
     chooses to pursue such Proposal by executing it in writing, Erwin and HCC
     will negotiate in good faith to arrive at the applicable Finder's Fee.

     In the event Hanover believes that Erwin has violated or is in the process
     of violating any provision of Paragraph 9, Hanover shall, before initiating
     any action for temporary or permanent injunctive relief or damages, notify
     Erwin in writing of such alleged violation. Such notification shall specify
     with reasonable particularity the alleged violation. Further, before
     initiating any action for temporary or permanent injunctive relief or
     damages, Hanover and Erwin agree to meet within seven (7) days of the
     notification to Erwin to discuss the alleged violation and the parties
     shall, in good faith, attempt to resolve the alleged violation. If, after
     such meeting, Hanover continues to believe that Erwin is in violation of
     Paragraph 9 and initiates action for injunctive relief or damages, Hanover
     may cease to make further payments under Paragraph 9, provided however,
     that if Hanover does not subsequently obtain a court order or judgment
     finding that Erwin has in fact violated the provisions of Paragraph 9, then
     Hanover shall be obligated to pay Erwin promptly all amounts due under
     Paragraph 9 that were withheld and to resume any remaining payments.

                                       Page 7 of 11

<PAGE>

10.  Injunctive Relief. It is agreed by the parties that the foregoing covenants
     in Paragraph 9 impose a reasonable restraint on Erwin in light of the
     activities and business of Hanover on the date of the execution of this
     Agreement. All of the covenants in Paragraph 9 shall be construed as an
     agreement independent of any other provision in this Agreement, and the
     existence of any claim or cause of action of any of the Erwin Parties
     against any of the Hanover Parties, whether predicated on this Agreement or
     otherwise, shall not constitute a defense to the enforcement by Hanover of
     such covenants. Because of the difficulty of measuring economic losses to
     Hanover as a result of a breach of any covenant in Paragraph 9 above, and
     because of the immediate and irreparable damage that could be caused to
     Hanover for which they would have no other adequate remedy, Erwin agrees
     that in the event of a breach by the Erwin Parties, the foregoing covenants
     may be enforced by Hanover by injunctions, restraining orders and other
     equitable actions, without the posting of any bond.

11.  Confidentiality of Agreement. Erwin agrees that the Erwin Parties will not
     disclose, or cause to be disclosed, the terms of this Agreement, except to
     Erwin's attorneys, accountants, and/or tax advisors, or as otherwise
     required by law.

12.  Cooperation. Erwin agrees that he will act at all times hereafter in a
     manner not inconsistent with the interests of Hanover with respect to their
     shareholders, customers, employees, agents, and third parties; and will not
     defame or disparage Hanover nor their employees. Erwin further agrees that
     he will provide reasonable cooperation to Hanover at reasonable and
     mutually agreeable times in response to requests made by Hanover in matters
     relating to internal investigations, external investigations, and/or
     judicial or administrative proceedings arising out of or relating in any
     way to any facts occurring prior to Effective Date of this Agreement,
     including but not limited to, participating in conferences and meetings,
     advising counsel, making himself available for interviews, providing
     documents or information, aiding in the analysis of documents, testifying,
     or complying with any other reasonable requests by Hanover; provided, that
     such cooperation will not require Erwin to waive any privilege or to forgo
     his constituted right to decline to testify against himself in any
     investigation, Congressional hearing, grand jury, or any other judicial or
     administrative proceeding. Erwin agrees to maintain in confidence (except
     pursuant to regulatory request, subpoena, court order, or any other legal
     process) any information regarding past, current or potential claims,
     governmental proceedings, investigations or administrative or judicial
     litigation relating to Hanover, and agrees not to communicate with any
     party(ies) who he knows or should have known is adverse or potentially
     adverse to the Company, including attorneys (other than his own counsel),
     investigators or others, except pursuant to valid regulatory request,
     subpoena, court order, or other legal process. Erwin agrees to provide
     notice of any motion, subpoena, order, regulatory request or other
     correspondence relating to Hanover as soon as practicable and in any event
     no later than three (3) days of his receipt of same, by forwarding such
     document or providing notice of any oral request to the General Counsel,
     Hanover Compressor Company, 12001 N. Houston Rosslyn, Houston, Texas 77086,
     (281) 405-5166. This cooperation is an integral part of this Agreement, and
     Erwin will not be compensated for such cooperation, other than
     reimbursement for any reasonable expenses Erwin may incur in connection
     with such cooperation.

13.  Indemnification of Hanover. Erwin agrees to pay federal and state taxes, if
     any, that he is required by law to pay with respect to this Agreement. If
     Erwin fails to pay any required

                                       Page 8 of 11

<PAGE>

     taxes with respect to this Agreement, Erwin agrees to indemnify and hold
     harmless Hanover from any claims, demands, deficiencies, levies,
     assessments, penalties or recoveries by any government or entity against
     Erwin for any amounts claimed due on account of Erwin's failure to pay any
     required taxes with respect to the amounts designated in this Agreement,
     including Hanover's reasonable attorneys' fees in any disputes related to
     those payments.

14.  Consulting Services. Erwin agrees to provide, until December 31, 2003,
     reasonable consulting services to Hanover (the "Consulting Services").
     Erwin shall provide the consulting services at the direction of the
     Chairman of the Board of Directors of Hanover. Erwin will be an independent
     contractor and is not authorized to represent any of the Hanover Entities.
     Erwin shall be entitled to cease providing Consulting Services to Hanover
     by giving Hanover thirty (30) days prior written notice. In consideration
     for Erwin's agreement to provide Consulting Services, Hanover shall
     provide, until December 31, 2003, health and medical benefits to Erwin and
     his family on a basis (and at a cost) substantially similar to those
     benefits provided to Hanover's employees. At such time as Erwin elects to
     terminate its obligations to provide Consulting Services, Hanover shall
     cease providing such health and medical benefits.

15.  Acknowledgement. Erwin acknowledges, represents and agrees that Erwin has
     been fully informed and is fully aware of Erwin's right to discuss any and
     all aspects of this matter with an attorney of Erwin's choice, that Erwin
     has carefully read and fully understands all of the provisions of this
     Agreement, and that Erwin accepts the terms of this Agreement as fair and
     equitable under all the circumstances and voluntarily executes this
     Agreement.

16.  Non-Admission. This Agreement is not an admission by Erwin or Hanover of
     any wrongdoing or liability.

17.  No Future Employment. Erwin agrees that Erwin waives any right to
     reinstatement or future employment with Hanover or any of its affiliates
     following Erwin's Effective Date.

18.  Notices. Except as otherwise specifically provided herein, notices and
     other communications provided for herein shall be in writing and shall be
     hand delivered or mailed:

         If to Hanover:

         Hanover Compressor Company
         12000 N. Houston Rosslyn
         Houston, Texas 77086
         Attention:  Chief Executive Officer
         With copy to the General Counsel

         If to Erwin:

         Charles D. Erwin
         5553 Tilbury
         Houston, Texas 75206

                                       Page 9 of 11

<PAGE>

     or such other address as either party shall provide to the other by notice
     sent as provided in this section.

     All notices and other communication given to a party hereto in accordance
     with the provision of this Agreement shall be deemed to have been given on
     the date of receipt.

19.  Entire Agreement. This Agreement sets forth the entire Agreement between
     Erwin and Hanover. Further, it supercedes and extinguishes any prior
     understandings or written or oral agreements between the parties. No one
     has promised Erwin anything that is different from what is set forth in
     this Agreement. No other promises or agreements shall be binding upon Erwin
     or Hanover with respect to the subject matter of this Agreement unless
     separately agreed to in writing.

20.  Assignment. This Agreement and all the provisions hereof shall be binding
     upon and inure to the benefit of the parties hereto and their respective
     successors, heirs, legal representatives and assigns, but neither this
     Agreement nor any of the rights, interests, or obligations hereunder shall
     be assigned by either of the parties hereto without the prior written
     consent of the other party.

21.  Controlling Law. (a) This Agreement has been made in the State of Texas and
     Texas law applies to it. If any part is found to be invalid, the remaining
     parts of the Agreement will remain in effect as if there were no invalid
     part; (b) Erwin and Hanover agree that this Agreement is intended to, and
     in all respects should be interpreted and enforced in a manner that renders
     it consistent with, and in no manner in violation of, the Sarbanes-Oxley
     Act of 2002.

22.  Miscellaneous. This Agreement is intended to settle and release any and all
     claims for damages, benefits, and attorneys' fees and/or costs. Erwin
     agrees that, except as provided by this Agreement, he is not entitled to
     any income, payments, salaries, or other financial benefits from any of
     Hanover. The parties agree that this Agreement may be used as evidence in a
     subsequent proceeding in which any of the parties allege a breach of this
     Agreement or as a defense to any lawsuit brought by either party. Other
     than these two exceptions, the parties agree that this Agreement will not
     be introduced as evidence in any proceeding or in any lawsuit.

                                       Page 10 of 11

<PAGE>

                                            HANOVER COMPRESSOR COMPANY

/s/ Charles D. Erwin                        By: /s/ Victor E. Grijalva
-----------------------------------             --------------------------------
Charles D. Erwin                                [name]  Victor E. Grijalva
                                                [title] Chief Executive Officer

Date: 8-2-02                                Date:   8/5/02
     -----------------                           -----------------------

                                            HANOVER COMPRESSION LIMITED
                                            PARTNERSHIP

                                            By: /s/ John E. Jackson
                                                --------------------------------
                                                [name]  John E. Jackson
                                                [title] Chief Financial Officer

                                            Date:   8/5/02
                                                 -----------------------

                                       Page 11 of 11

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