Actually, you could deliberately place the wolf-fetish near the entrance to the mine with all the bats and antlions and that would be about perfect.

I wonder if this is a case of "right about the problem, wrong about the solution". 

The issue is that dying as much as you have is incredibly punishing due to the XP pentalty.

Is reducing the XP penalty the right solution, though? What is causing all the dying? I am guessing that simply excercising additional caution is not a viable solution, right? Are there any mechanics of the game that would allow you to survive those same circumstances better? healing? defensive play? If those are not viable because the game demands you defeat an unrealistically difficult set of enemies before gaining access to such features, then that is where the solution should be adjusted; make those features accesable at a lower initial threshold. If not, then the solution may be to enhance methods of staying alive instead of reducing the penalty for dying. Yes, no, yes?

EDIT: sorry, just noticed your follow-up response where you suggested many of the same alternatives. 

I don't mind hard problems to solve in a game. I'm not generally bad at adapting my style of play and accepting that something is hard, and I don't mind adopting a "hit and run"
style of play. The problem is the fact that the game becomes such a slog - fail a couple times then the way to get enough experience to attempt the next level is to go back to a level you've previously cleared and do the same thing for the second or third time. Ideally, in a video game your character dies every once in awhile, and that's not a problem, and with the right mindset it's part of the fun. In fact, I really enjoy the "be careful, adopt a hit and run style of fighting" kind of play - it's exactly what the original Flare is missing most of the time, and I think you've got that part absolutely right. I enjoy trying to lure a single goblin away from the group so I can bushwhack them, and I certainly don't mind losing a boss or semi-boss battle. (I just lost to the spiked boar with the three spear-throwing goblins in front of it in the Boar Tribe level.) BTW, I loved the Goblins riding the boars - very well done! (Have you ever read National Lampoon's "Bored of the Rings?")

All that said, I think it can be calibrated fairly easily; if the experience loss means that someone has to go back to another level and replay the whole thing, it's not a good penalty.

That said, I was VERY pissed when the cut scene played in the middle of a battle inside the Goblin Mine in the forest - definitely a party foul! (You could fix that fairly easily; put a gate between the two parts of the mine, attached to a nearby switch, and don't trigger the cut scene until someone approaches the gate. but has not opened it. Or better yet, create a key instead of switch, so the cut scene plays before the open the gate, but after they can "see through" the bars in the gate.)

I think what you have is one big problem, and it's generating a lot of little problems for you. The Flare engine is really good at doing things like managing experience, levels and inventory, including the initial distribution of items, and you're trying to get it to be something it's not, which means you're throwing whatever playtesting the people who built Flare did right out the window (and then getting frustrated with the results.) So tell the story of the player character growing up and taking responsibility, and really lean into that, and let Flare do what it's good at.

A final thought, at least for this set of messages: If you want the game to be better at being hard, get rid of the stuff that changes a character's stats, like the Minor Rings of Intelligence and other items which affect character statistics. This will make the items* in the game much easier to manage, and it will give play a greater feeling of the poverty the main character experiences. Also, restrict the distribution of magical items to those the character might really need. If you do this and have the character lose 10% experience, I think it will be just as hard, but for much better reasons. (Or you could have the character lose the experience they've gained since they entered the new level, which would probably make the most sense.)

*One of my experiences playing today was when I threw out the wrong item, then it auto-removed my gloves, knife, armored pants and armored shirt. Then I had to figure out what I'd done to so weaken myself. My fault, but still an unnecessary pain in the gluteus - it definitely kicked me out of the story. And there have been a couple times when I removed Item A to use Item B, then couldn't use Item B because Item A gave me the bonus which made using Item B possible... This stuff also goes away if you stop arguing with Flare and just tell your story, (and do your world-building, etc.) and the story is the heart of what makes Heresy good! (I'm much more engaged with the character in Heresy than in Flare!)

Sorry, one more "final word." I finally figured out exactly why the experience loss is bothering me. (Note that the exact EXP numbers are made up.) Let's imagine that I gain third level halfway through the Forest. I then finish the Forest with 5500 experience points. Now I go into the Goblin Mine, where I gain 500 experience points then die. The game then removes 1800 experience points. 500 EXP was gained in the Goblin Mine. 1300 come from the Forest.

Now I have 4200 EXP left.

I think about what happened to me and try a new strategy, but it doesn't work. I rack up another 300 EXP, then die again, and I lose 1260 EXP. 300 points came from the Goblin Mine, and 960 came from the Forest.

I've now lost 800 Goblin Mine EXP and 2260 Forest EXP. I have 2940 EXP left. A couple more failed strategies and I've lost around 3500 Forest EXP. I don't merely have to repeat the Goblin Mine to regain my EXP, I also have to go through the Forest again.

So I think the way to do it is to remove all the EXP gained in the Goblin Mines, even if someone has completed 99 percent of the level (and generalize this to all the levels/areas of the game.) That way the worst slog anyone will endure is replaying a level, but they might lose ALL of the EXP for an entire level/area.

Hopefully Flare can do this. Does it store EXP in something that can be queried for this information? If not, can it emit a file with the information about the final EXP when someone leaves an area?

What's the game coded in, anyway?

For what it's worth, I'm really enjoying it except for the EXP issue. I may play with the engine.txt just for fun. (I assume you played the original Flare, and you probably know it took gold instead of EXP.)

I think what I'd urge you to do is fix whatever issue starts the cut scene in the middle of a battle. That's just not cool!

Other than that, do whatever you'd like with the EXP, though I'd suggest fixing it.

Yes, what happened to me was that I was in the middle of a fight, and I stumbled across whatever triggers the cutscene. So there I was doing battle and suddenly I couldn't see my character or the enemies - not a good place to be! This is why I suggested that maybe putting up a gate with a key might be a good idea. Then the player could look through the bars of the gate and see what's going on with the Shaman.

Does that make any sense?

I just finished the ending of Part I. Very nicely done, it felt like you really put your heart and soul into that one!