SEVERANCE AGREEMENT AND RELEASE

Exhibit 10.1

SEVERANCE AGREEMENT AND RELEASE

     This Severance Agreement and Release (the “Agreement”) is effective on the date described in Section 17. This Agreement is made as a mutually agreed compromise among the Parties for the complete and final settlement of all claims, differences, and causes of action existing between them as of the Effective Date of this Agreement.

Parties

     The parties to this Agreement are PetroQuest Energy, Inc., a Delaware corporation (the “Company”) and Ralph J. Daigle, an individual (“Employee”). Employee and the Company are collectively referred to as the “Parties.”

Preamble

     WHEREAS, Employee previously served as a director of the Company and was previously employed as an officer and employee of the Company, to perform work at the Company’s workplace in Lafayette, Louisiana and Houston, Texas, pursuant to an Employment Agreement dated September 1, 1998, and subsequently amended (the “Employment Agreement”);

     WHEREAS, Employee and the Company also entered into a Termination Agreement dated December 16, 1998, and subsequently amended (the “Termination Agreement”);

     WHEREAS, Employee and the Company also entered into an Indemnification Agreement dated December 16, 1998 (the “Indemnification Agreement”);

     WHEREAS, Employee held certain other positions as an employee, officer or director of certain subsidiaries and affiliates of the Company;

     WHEREAS, Employee desires to resign from the Company and/or its Affiliates effective March 31, 2005;

     WHEREAS, the Parties intend that this Agreement shall govern all issues related to Employee’s employment with and separation from the Company and/or its Affiliates;

     WHEREAS, Employee has had at least 21 days to consider this Agreement;

     WHEREAS, the Company has advised Employee in writing to consult with a lawyer;

     WHEREAS, Employee has had an opportunity to consult with independent counsel with respect to the terms, meaning and effect of this Agreement; and

     WHEREAS, Employee understands that the Company regards the above representations as material and that the Company is relying on these representations in entering into this Agreement.

Agreement

     NOW THEREFORE in consideration of the mutual promises exchanged in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

     1. Definitions. When used in this Agreement, “Company and/or its Affiliates” shall mean and include PetroQuest Energy, Inc., a Delaware corporation, and all of its predecessors, successors, parents, subsidiaries, divisions or other affiliated companies, partners, partnerships, assigns, present and former officers, directors, employees, shareholders, agents, employee benefit plans and plan fiduciaries, whether in their individual or official capacities.

     2. Termination Date. Employee’s employment with the Company ended effective March 31, 2005 (the “Termination Date”). Employee hereby resigns all positions he holds as an employee, officer or director of the Company and/or its Affiliates, effective as of the Termination Date, and agrees to provide a letter of resignation to the Company in the form attached as Exhibit “A”.

     3. Pay Through Termination Date. Not later than thirty (30) days after the Effective Date, the Company will pay Employee the sum of $5,000.00. Employee agrees that this payment includes all accrued employment benefits payable to Employee, including without limitation all salary, wages, and accrued and unpaid vacation leave, sick time or other paid time off earned before the Termination Date.

     4. Severance Pay. As consideration for Employee’s release, the Company further agrees to pay Employee, his successors and assigns the sum of $180,000.00 (the “Severance Pay”), representing twelve (12) months’ pay. The Company will pay this additional amount, commencing April 15, 2005, in equal payments over twenty-four (24) months, at the same time and in the same manner that the Company pays its other employees as part of its normal payroll process. Employee agrees that the Severance Pay is in addition to anything of value to which Employee already is entitled from the Company, and that the Severance Pay is in satisfaction of any claim for unpaid, deferred or reduced salary, wages or compensation of any sort, including without limitation any agreements by Employee with the Company, whether oral or written, to forego salary and bonuses payable to Employee under the Employment Agreement or otherwise in 2003 and prior years.

     5. Additional Severance Benefits. As additional consideration for Employee’s release, and provided that Employee is eligible for and timely elects COBRA continuation coverage, the Company will pay 100% of applicable COBRA insurance premiums for the benefit of Employee and Employee’s spouse under Employee’s current group plan election (the “Additional Severance Benefits”), until the earlier of (a) eighteen (18) months after the Termination Date; or (b) the date Employee obtains other employment and becomes eligible for benefits through such subsequent employment; or (c) the date any such group plan is terminated. As further consideration for this Agreement, Employee will receive from the Company the furniture and equipment identified on Exhibit “B-1”.

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     6. Office Furniture and Files. Employee, for and in consideration of the sum of $11,000.00 hereby sells and delivers to the Company the office furniture listed on Exhibit B-2 hereto and Employee hereby transfers and quitclaims to the Company any other furniture, furnishings or equipment of Employee in the Company’s possession. Files, data and other materials of Employee remaining with the Company after the Termination Date and not removed by Employee will be maintained by the Company for a period for one (1) year after the Termination Date and available to the Employee for copying; thereafter, such materials shall be surrendered by the Employee and shall become the property of the Company. The Company will have no obligation to keep or maintain such files and materials thereafter

     7. Withholding. All amounts paid pursuant to this Agreement will be reduced by withholdings required, in the Company’s reasonable discretion, by applicable local, state or federal law.

     8. Release by Employee. (a) In consideration of the Severance Pay and the Additional Severance Benefits, all described above, Employee, individually and on behalf of Employee’s spouse, life partner, heirs, administrators, executors, guardians, assigns and agents, irrevocably, unconditionally, fully and forever waives, releases, discharges, agrees to hold harmless, and promises not to sue the Company and/or its Affiliates, from and for any claim, action or right of any sort, known or unknown, arising on or before the Effective Date.

     (a) This release includes, but is not limited to, any claim arising out of or related to the following: any claim for any wages, salary, compensation, sick time, vacation time, paid leave or other remuneration of any kind; any claim for additional or different compensation or benefits of any sort, including any participation in any severance pay plan; any claim of discrimination or retaliation on the basis of race, sex, religion, marital status, sexual preference, national origin, handicap or disability, veteran status, or special disabled veteran status; any claim arising under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Employee Retirement Income Security Act of 1974, the Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act of 1938, the Louisiana Employment Discrimination Law, the Louisiana Wage Payment Law, the Texas Commission on Human Rights Act, Chapter 451 of the Texas Labor Code, or the Texas Payday Law, as such statutes may be amended from time to time; any other claim based on any statutory prohibition; any claim arising out of or related to an express or implied employment contract, any other contract affecting terms and conditions of employment, or a covenant of good faith and fair dealing; any tort claim or other claim for personal injury, death or property damage or loss; any claim for fraud or misrepresentation; and any personal gain with respect to any claim arising under any whistleblower or qui tam provisions of any state or federal law.

     (b) Employee represents that Employee has read and understands this release provision and that (i) rights and claims under the Age Discrimination in Employment Act of 1967 are among the rights and claims against the Company and/or its Affiliates that Employee is releasing and (ii) Employee is not releasing any rights or claims arising after the Effective Date.

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     (c) Notwithstanding anything to the contrary in this Section, Employee is not releasing any right to (i) any vested benefit under any employee benefit plan, as defined by the Employee Retirement Income Security Act of 1974, as amended, (ii) any rights to COBRA continuation coverage, (iii) any rights provided in the Indemnification Agreement, which shall continue in effect in accordance with its terms, or (iv) any rights provided in this Agreement.

     9. Termination of Previous Agreements. The Parties agree that the Employment Agreement is hereby terminated and of no further force and effect as of the Termination Date, except that the following identified portions of the Employment Agreement shall survive termination, in accordance with their terms: Section 8 (regarding Employee’s Confidentiality Obligation), Section 9 (regarding Disclosure of Information, etc.), Section 10 (regarding Ownership of Information, etc.), Subsection 12.7 (regarding Injunctive Relief). The Parties further agree that the Termination Agreement is hereby terminated and of no further force and effect as of the Termination Date.

     10. Non-Competition. In consideration of the Severance Pay and the Additional Severance Benefits, as described above, Employee and the Company agree to terminate Section 11 of the Employment Agreement, regarding Employee’s Non-Competition Obligation, and replace it with the following:

     (a) The Company is engaged in the business of generating, developing acquiring and operating oil and gas properties onshore and offshore in the United States Gulf coast region, East Texas and the Arkoma Basin (the “Business”). The Company presently carries on business in the parishes, municipalities and geographic areas included on Exhibit “C” hereto (the “Areas of Interest”):

     (b) In order to maintain its competitive advantage relative to others in the Business, the Company gathers, keeps and maintains certain Confidential Information (as defined in Section 8 of the Employment Agreement). Employee acknowledges and agrees that Employee has learned such Confidential Information during his employment with the Company.

     (c) Employee acknowledges that the Company could not protect the Confidential Information against unauthorized use or disclosure and could not readily insure compliance with this Agreement and the surviving provisions of the Employment Agreement if Employee held any interest in a competitor in the Business or enabled the Company’s personnel or customers to become personnel or customers of a competitor in the Business.

     (d) In order to protect against unauthorized disclosure, and in addition to the other rights of the Company created or retained hereunder with respect to the Confidential Information, Employee agrees that, for a period of one (1) year following the Termination Date, Employee shall not, acting alone or in conjunction with others, without prior written notice to the Company and an offer by Employee to the Company for the Company to participate with Employee in such activities on the same basis and terms as Employee, unless agreed otherwise, directly or indirectly, in any of the Areas of

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Interest in which the Company and/or its Affiliates is presently or at the Termination Date carrying on Business, (i) acquire or secure the right to acquire any mineral rights, interests or oil and gas properties or operate any oil and gas properties within the Areas of Interest unless it is by, through or under the Company or for the benefit of the Company, or (ii) invest or engage, directly or indirectly, in any business which is similar to that of the Company’s Business or accept employm