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      draft letter to SEC responding to 092506 letter

    October
      9,
      2006
DRAFT

    Mr.
      Karl
      Hiller

    Branch
      Chief

    Division
      of
      Corporation Finance

    Securities
      and
      Exchange Commission

    Washington,
      D. C.
      20549-7010

    Re: Hallador
      Petroleum
      Company

    Form
      10-KSB for the
      year ended December 31, 2005

    Form
      10-QSB for the
      quarter ended June 30, 2006

    Your
      file No.
      0-14731

    Dear
      Mr.
      Hiller:

    This
      letter is in
      response to your September 25, 2006 letter. The information below corresponds
      to
      the numbered comments in your letter.

            1.

              Your
                comment
                No. 1 deals with the statements of changes in stockholders’
                equity.

    Our
      response:

    We
      agree that Regulation S-B requires a separate of Stockholders’ Equity. Please
      note Rule 3-04 of Regulation S-X where such information can be given in a note
      or a separate statement. For the last several years the only change we had
      in
      stockholders equity was net income. For the year ended December 31, 2005 we
      disclosed in Note 1 on page 22 a table of changes in stockholders' equity as
      we
      had activity other than net income. We feel that the disclosure is adequate.
      For
      future filings we will include a separate statement if there is material
      activity in the accounts.

    We
      pride ourselves in keeping our disclosure brief, transparent and to the point
      and not to burden the readers of our filings with unnecessary
      disclosures.

            2.

              Your
                comment
                No. 2 deals with the cash flow
                statement.

    Our
      response:

    The
      intent on
      repurchasing the limited partnership interests was to provide liquidity to
      the
      limited partners. Consistent with paragraph
      20 of SFAS No.
      95, payment
      of
      dividends, distributions and outlays to reacquire an enterprises equity
      instruments are considered cash outflows from financing activities. We believe
      the presentation of these amounts in our statement of cash flows is consistent
      with the guidance in SFAS No. 95 in addition to the intent and purpose of these
      payments by the Company.

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            3.

              Your
                comment
                No. 3 deals with the entitlement method for our oil and gas
                sales.

    Our
      response:

    We
      are the operator of the San Juan field which accounts for over 66% of our gas
      sales. There are twenty-eight producing gas wells in the field. During the
      past
      several years we have never been in any material over/under produced situation.
      In future filings we will address any material over/under produced
      situation.

            4.

              Your
                comment
                No. 4 deals with our purchase of outstanding stock
                options.

    Our
      response:

    We
      will revise our statement of
      cash
      flows
      to reflect these
two
      items
      in
      operating
      activities.
      We will make these
      changes in our Form 10-KSB for the year ended December 31, 2006.

    We
      have accounted for stock options in accordance with APB 25 as disclosed in
      our
      accounting policy footnote. When we sold the Cuyama oil and gas field in August
      2004 we concluded to reward our employees by giving them cash bonuses and also
      by buying out their stock options. Because our stock is (i) on the OTC Bulletin
      Board, (ii) is thinly traded, and (iii) over 85% is controlled by board members
      and their affiliates there is not a true market for our stock. We concluded
      our
      employees would not receive a fair price if they exercised their options and
      then sold the stock. We consider the 2004 sale of the Cuyama field to be a
      monumental event in the life of our company. We had owned the field since
      1990.

    We
      arrived at the $2.80 based on a determination by our board of directors that
      such amount represented a fair price.

    In
      January 2001, we purchased for $300,000 options from our employees. The trigger
      events for this action were: (i) none of our employee options have been
      exercised since 1990, and (ii) in January 2001 we were experiencing high prices
      for oil and gas sales. We wanted to share with our employees the results of
      the
      high prices.

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            5.

              Your
                comment
                No. 5 deals with our oil and gas reserve
                estimates.

    Our
      response:

    Edwin
      James is the
      consulting engineer. He lives in Seattle, Washington.

    His
      address is 1612
      37th Ave, Seattle, WA 98122 and his phone number is (206) 328-6458. We take
      no
      exception disclosing this in our next Form 10-KSB but would like to understand
      the purpose of the request. We are not aware of any SEC requirements to include
      such information in a 1934 Act filing. Since our Form 10-QSB does not include
      reserve information we think it might be confusing to the readers if we include
      Mr. James’s name in such filing.

            6.

              Your
                comment
                No. 6 deals with the accounting of Executive
                compensation.

    Our
      response:

    Such
      amounts are
      included in the gain on sale of discontinued operations for 2004.

    Of
      the $1,251,900 reported in our compensation table, $981,000 is included in
      the
      $1,305,000 originally reported in cash flows from financing activities and
      the
      remainder is included in cash flows from operating activities. As indicated
      in
      our response to comment 4 we will be revising our statement of cash flows to
      reflect these amounts entirely in cash flows from operating
      activities.

            7.

              Your
                comment
                No. 7 deals with our receivable from Sunrise and our
                investment.

    Our
      response:

    The
      $3,814,000
      receivable was paid on July 31, 2006 as disclosed on the face of the June 30,
      2006 balance sheet.

    The
      investment in
      Sunrise was $1,500,000. The investment in CELLC was $127,000. The third
      paragraph to Note 7 to the June 30, 2006 interim financial statements discusses
      the $1,500,000 amount vis-à-vis FIN 45. Once we begin consolidating Sunrise,
      this investment account will no longer appear.

    The
      $7,000,000 loan
      to Sunrise as of March 31, 2006 was repaid by Sunrise in April 2006 as disclosed
      on the face of the March 31, 2006 balance sheet included in our first quarter
      Form 10-QSB.

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            8.

              Your
                comment
                No. 8 deals with MD&A.

    Our
      response:

    We
      have a verbal agreement with Indiana Power and Light (IPL.) A definitive
      agreement should be finalized during the fourth quarter. The verbal agreement
      calls for a payment of $.10 per ton as coal is produced from the Carlisle mine
      for the first two years and $.25 per ton in future years for the life of the
      mine. If coal is not mined, we have no obligation to pay. In view of the fact
      that the coal will be selling at $27 per ton, we view this settlement as not
      significant. We are expecting a document from IPL soon.

    Your
      comment No. 9
      deals with controls and procedures.

    Our
      response:

    We
      will revise our disclosure to comply as requested in our future filings
      beginning with the September 30, 2006 Form 10Q-SB.

    We
      acknowledge that :

            1.

              We
                are
                responsible for the adequacy and accuracy of the disclosure in our
                filings.

            2.

              the
                staff
                comments or changes to disclosure in response to staff comments do
                not
                foreclose the Commission from taking any action with respect to the
                filing; and

            3.

              we
                may not
                assert staff comments as a defense in any proceeding initiated by
                the
                Commission or any person under the federal securities laws of the
                United
                States.

    Yours
      truly,

      /S/VICTOR
        P.
        STABIO

    Victor
      P.
      Stabio,

    President
      and
      CEO

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