U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-25386
FX ENERGY, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0504461
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
(Address of principal executive offices)
(801) 486-5555
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date: 12,646,881 shares of $.001 par value
common stock outstanding as of October 28, 1997.
Transitional Small Business Disclosure Format: Yes No X
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,206,543
Investment in marketable debt securities, at cost 3,350,161
Accounts receivable:
Accrued oil sales 221,455
Due from joint interest owners and others 460,596
Interest receivable 65,690
Inventory 19,931
Other current assets 75,726
----------
Total current assets 11,400,102
----------
Property and equipment, at cost:
Oil and gas properties (successful efforts method):
Proved 7,291,709
Unproved 1,015,077
Other property and equipment 2,209,076
----------
10,515,862
Less accumulated depreciation, depletion and
amortization (1,856,000)
----------
Net property and equipment 8,659,862
----------
Other assets:
Certificates of deposit 381,500
Other 32,292
----------
Total other assets 413,792
----------
TOTAL ASSETS $ 20,473,756
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 904,705
Accrued liabilities 111,675
----------
Total current liabilities 1,016,380
----------
Long-term debt: --
----------
--
Total liabilities 1,016,380
----------
Commitments --
Stockholders' equity:
Preferred Stock, $.001 par value; 5,000,000 shares
authorized, none issued and outstanding --
Common stock, $.001 par value; 30,000,000 shares
authorized, 12,604,381 issued and outstanding 12,604
Additional paid-in capital 30,265,684
Accumulated deficit (10,820,912)
----------
Total stockholders' equity 19,457,376
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,473,756
==========
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1997 1996 1997 1996
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil sales $ 483,910 $ 611,235 $ 1,562,624 $ 1,688,343
Drilling revenue 414,674 2,996 487,140 10,721
----------- --------- ----------- ----------
Total revenues 898,584 614,231 2,049,764 1,699,064
----------- --------- ----------- ----------
Operating costs and expenses:
Operating costs 226,106 249,375 777,427 797,871
Production taxes 30,322 39,227 108,313 114,200
Exploration costs 1,915,559 333,302 4,111,791 727,671
Drilling costs 178,028 15,050 311,761 41,086
Depreciation, depletion and
amortization 160,777 129,794 469,294 405,286
General and administrative 643,895 332,771 1,892,676 1,058,633
----------- --------- ----------- ----------
Total operating costs
and expenses 3,154,687 1,099,519 7,671,262 3,144,747
----------- --------- ----------- ----------
Operating loss (2,256,103) (485,288) (5,621,498) (1,445,683)
----------- --------- ----------- ----------
Other income (expense):
Interest and other income 575,145 118,842 967,048 175,661
Interest expense (534) (46,442) (83,273) (217,515)
----------- --------- ----------- ----------
Total other income
(expense) 574,611 72,400 883,775 (41,854)
----------- --------- ----------- ----------
Net loss before extraordinary
gain (1,681,492) (412,888) (4,737,723) (1,487,537)
Extraordinary gain:
Baltic concession (Note 5) 15,183 - 3,076,242 -
----------- --------- ----------- ---------
Net loss $ (1,666,309) (412,888) (1,661,481) (1,487,537)
=========== ========= =========== =========
Net loss per common share
Net loss before
extraordinary gain (0.13) (0.04) (0.37) (0.16)
Extraordinary gain - - 0.24 -
----------- --------- ----------- ----------
Net loss per common $ $ $ $
share (0.13) (0.04) (0.13) (0.16)
=========== ========= =========== =========
Weighted average number of
common shares outstanding 12,597,316 10,886,783 12,580,872 9,201,492
=========== ========= =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For nine months ended
September 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,661,481) $(1,487,537)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary gain (3,076,242) -
Depreciation, depletion and
amortization 469,294 405,286
Dry hole costs 210,000 -
Leasehold impairments 435 -
Common stock and options issued for 38,125 147,750
services
Increase (decrease) from changes in:
Accounts receivable (228,971) (1,221,388)
Inventory 285 (5,175)
Other current assets (8,243) (129,812)
Advances from non-operators - 88,510
Accounts payable and accrued
liabilities 430,184 (297,931)
---------- ----------
Net cash used in operating
activities (3,826,614) (2,500,297)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (1,119,445) (792,688)
Additions to other property and equipment (349,528) (201,184)
Additions to other assets (32,292) (164,100)
Proceeds from sale of interest in unproved
properties 300,000 325,000
Proceeds from sale of equipment 13,051 9,700
Purchase of marketable debt securities (3,350,161) (5,978,595)
Proceeds from marketable debt securities 5,476,574 -
Purchase of certificate of deposit - (300,000)
---------- ----------
Net cash provided by or (used)
in investing activities 938,199 (7,101,867)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt - (3,661,648)
Proceeds from long term debt 1,575,992 -
Proceeds from issuance of common stock,
net of offering costs - 19,475,103
Exercise of warrants and options 173,052 223,707
---------- ----------
Net cash provided by financing
activities 1,749,044 16,037,162
---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,139,371) 6,434,998
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 8,345,914 743,721
---------- ----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 7,206,543 $ 7,178,719
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FX ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The interim financial data are unaudited; however, in the opinion of the
management of FX Energy, Inc. and Subsidiaries ("FX Energy" or the "Company"),
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The financial statements should be read in conjunction with FX
Energy's annual report on Form 10-KSB for the year ended December 31, 1996 and
the quarterly report on Form 10-QSB for the three months ended March 31, 1997
and the six months ended June 30, 1997.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in the consolidation. At September 30, 1997,
the Company owned 100% of the voting stock of its subsidiaries, including FX
Producing Company, Inc. ("FX Producing").
NOTE 2: INVESTMENT IN MARKETABLE DEBT SECURITIES
The Company had $5,477,000 invested in short term bonds at December 31,
1996. The entire bond portfolio matured during the first quarter of 1997 and
the Company subsequently reinvested $3,350,000 of the proceeds into additional
short term bonds during the first nine months of 1997. The Company intends to
hold these bonds to maturity.
NOTE 3: INCOME TAXES
The Company recognized no income tax benefit for the losses generated
during the first nine months of 1997 or for the nine months ended September 30,
1996.
NOTE 4: COMMON STOCK
During the nine months ended September 30, 1997 warrants for 22,500 shares
and options for 89,334 shares were exercised. This resulted in net proceeds of
$25,000 for the warrants and $148,000 for the options, respectively, to the
Company.
In connection with the purchase of the Company's producing oil properties
and well servicing equipment in 1994, the Company agreed to issue to the former
owners up to 400,000 shares of Company common stock in semi-annual increments of
50,000 shares each beginning October 1, 1994 on the attainment of certain levels
of oil production from the properties acquired. Production levels as of October
1, 1997 had not been reached. Accordingly, the number of shares that may be
issued in the future has been reduced to 50,000 shares.
NOTE 5: EXTRAORDINARY GAIN - BALTIC CONCESSION
On May 3, 1996, the Company entered into an agreement with RWE-DEA
Aktiengesellschaft fur Mineraloel und Chemie, Hamburg, Germany ("RWE-DEA"),
which provided for joint operations on the Company's approximately 2.4 million
acre on-shore Baltic Platform Concession area in northern Poland. The agreement
granted RWE-DEA the right to earn a fifty percent interest in the concession
area by paying the Company $250,000 in cash, paying up to $1,100,000 for a
seismic survey, paying $1,000,000 of costs relating to the initial exploratory
well to be drilled at a location to be designated by RWE-DEA and fifty percent
of the cost of the second exploratory well to be drilled at a location
designated by the Company. The Orneta #1, the initial exploratory well in the
Baltic Concession, was spudded in February 1997 and subsequently was determined
to be a dry hole in April 1997.
On June 30, 1997, RWE-DEA elected to not fund its fifty percent share of
costs relating to the second exploratory well in the Baltic Concession. As a
result, RWE-DEA forfeited its right to earn a fifty percent interest in the
Baltic Concession. The Company had initially recorded all funds received from
RWE-DEA as long term debt pending official approval by the Polish government of
RWE-DEA as a partner in the Baltic Concession. RWE-DEA had advanced the Company
$1,500,000 as of December 31, 1996 plus an additional amount of $1,576,000
during the first nine months of 1997, a total of $3,076,000, all of which the
Company was not obligated to reimburse back to RWE-DEA. Upon RWE-DEA's election
to not earn an interest in the Baltic Concession, the Company recognized its
long term note payable amount of $3,076,000 associated with RWE-DEA as income
and reflected it as an extraordinary gain for the nine months ended September
30, 1997.
The Gladysze #1-A, the second exploratory well in the Baltic Concession,
was spudded by the Company on July 14, 1997 without RWE-DEA as an interest
owner. On September 2, 1997 it was determined that the Gladysze #1-A contained
no commercial quantities of oil & gas and the well was subsequently plugged and
abandoned. The Company recorded dry hole costs of $1,242,000 relating to this
well.
NOTE 6: NET INCOME OR (LOSS) PER SHARE
Net income or (loss) per share of common stock is computed based on the
weighted average number of common and common equivalent shares outstanding
during the period. Options, warrants, and convertible preferred stock are
excluded from the calculation when their effect would be antidilutive.
NOTE 7: SUBSEQUENT EVENTS
On October 15, 1997 the Company was awarded the right to explore for oil
and gas in two additional areas in Poland. The first area, located in northwest
Poland ("Northwest Concession"), contains approximately 2.0 million acres for
which the Company will be obligated to pay approximately $260,000 in concession
costs and other fees, shoot 500 kilometers of seismic, and drill one well during
the first three years. The second area, located in the western Carpathian
region (Carpathian Concession"), contains approximately 1.2 million acres for
which the Company will be obligated to pay approximately $205,000 in concession
costs and other fees, shoot 350 kilometers of seismic, and drill one well during
the first three years. The Carpathian region lies within the area of mutual
interest ("AMI") between the Company and Apache Corporation ("Apache") created
on April 16, 1997. According to the agreement, the Company must offer Apache
the opportunity to participate with the Company in the exploration and
development of the Carpathian region on terms decided by the Company.
On October 16, 1997 the Company obtained exclusive gold exploration rights
over four additional blocks covering 95,000 acres in the Company's AMI with
Homestake Mining Company ("Homestake"). The new exploration area will be for
the joint benefit of the Company and Homestake.
The Company spudded the Mega Springs Federal #7, a wildcat well in Nevada,
on October 8, 1997. The well was plugged and abandoned after encountering no
commercial quantities of oil or gas after drilling to a total depth of 2,935
feet at an approximate cost of $75,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND
RESULTS OF OPERATIONS
Forward-Looking Information May Prove Inaccurate
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When
used in this document, the words "anticipate," "believe," "estimate," "expect,"
and "intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company respecting future events and
are subject to certain risks, uncertainties and assumptions, including the risks
and uncertainties noted. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. The Company undertakes no obligation or
responsibility to update these forward-looking statements to reflect events
or circumstances after the date hereof or the occurrence unanticipated events.
FINANCIAL CONDITION
Working Capital
The Company had working capital of $10,384,000 at September 30, 1997 as
compared to $13,843,000 at December 31, 1996. The decrease of $3,459,000 in
working capital is primarily attributable to $3,827,000 of cash used in
operating activities and asset additions of $1,201,000 which were partially
offset by $173,000 received from the exercise of stock options and warrants and
$1,576,000 relating to funds received from RWE-DEA during the first nine months
of 1997 which were initially recorded as long term debt.
In May 1997 the Company revised its credit facility with Bank One whereby a
borrowing base of $3,000,000 was established using assets owned by FX Producing,
a wholly owned subsidiary, as collateral. The borrowing base amount of
$3,000,000 will be reduced by $25,000 per month effective June 1, 1997. The
Company also arranged a revolving commitment amount of $100,000. Due to the
Company's current favorable working capital position, there are no immediate
plans to utilize Bank One's credit facility.
Operating Activities
The net cash used in operating activities during the nine months ended
September 30, 1997 was $3,827,000, an increase of $1,327,000 over the first nine
months of the 1996 amount of $2,500,000. The increase in net cash used in
operating activities is primarily attributable to increased exploration efforts
in the Company's Poland Concessions in which the Company drilled two dry holes
during the first nine months of 1997, the Orneta #1 at a cost of $1,834,000 and
the Gladysze #1-A at a cost of $1,242,000. The cost of the Orneta #1 was
partially offset by $1,576,000 received from RWE-DEA during the first nine
months of 1997.
Investing Activities
During the nine months ended September 30, 1997, the Company expended a net
amount of $1,119,000 on additions to oil and gas properties, as compared to
$793,000 during the same period of 1996. In May 1997 the Company drilled and
completed a successful exploration well, the State #31-8, on its Rattler's Butte
prospect in central Montana which is currently producing approximately 200
barrels of oil per day and is operated by another company. The well cost
$24,000, net to the Company's 6.25% working interest. In existing producing
fields, primarily the Cut Bank field in Montana, the Company spent $306,000 in
1997 upgrading its production facilities. The Company increased its domestic
undeveloped leasehold inventory in 1997 by spending $379,000, primarily in the
Williston Basin of North Dakota. In Poland the Company spent $110,000 in 1997
on concession acquisition costs and also received $300,000 from Apache relating
to Apache's participation in the Company's Lublin Concessions during 1997. The
Company currently has capitalized undeveloped leasehold costs of $533,000
domestically and $482,000 relating to Poland. In accordance with generally
accepted accounting principles, should the Company determine that the prospects'
capitalized costs are not recoverable following unsuccessful exploration
drilling or otherwise, the Company will record an impairment charge which may
materially and adversely affect the Company's results of operations for the
period during which such impairment is recognized.
Additions to other property and equipment totaled $350,000 during the first
nine months of 1997, an increase of $149,000 as compared to $201,000 for the
same period of 1996. In 1997 the Company spent $141,000 upgrading its computer
software and office equipment and had capital additions of $180,000 relating to
its drilling rig and well servicing equipment. The Company also enhanced its
fleet of pickups used in its drilling and producing operations by trading in two
pickups for $13,000 and purchasing two new pickups for $42,000.
Other assets increased $32,000 during the first nine months of 1997 as
compared to an increase of $164,000 in the same period of 1996. The Company
spent $32,000 on organizational and other costs relating primarily to four
newly formed Polish subsidiaries during the first nine months of 1997.
The Company had $5,477,000 invested in short term bonds as of December 31,
1996, all of which matured during the nine months ended September 30, 1997.
Proceeds of $3,350,000 were reinvested into short term bonds, with the remainder
of the proceeds being used primarily to partially fund the net cash used in
operating activities of $3,826,000 during the nine months ended September 30,
1997.
Financing Activities
During the first nine months of 1997 warrants and options for 111,834
shares were exercised resulting in net proceeds of $173,000 net to the Company.
Baltic Concession. On June 30, 1997 RWE-DEA elected to not fund its fifty
percent share of the second exploratory well in the Baltic Concession, which
resulted in the termination of RWE-DEA's right to earn a fifty percent interest
in the Baltic Concession. RWE-DEA had advanced the Company $3,076,000 relating
to costs incurred prior to its election, including $1,500,000 as of December
31, 1996 plus an additional $1,576,000 during the first nine months of 1997.
The Company is not obligated to reimburse RWE-DEA for any funds received from
RWE-DEA prior to the termination of its right to earn a fifty percent interest
in the Baltic Concession. The Company had initially recorded all funds received
from RWE-DEA as long term debt pending official approval by the Polish
government of RWE-DEA as a partner in the Baltic Concession and the completion
of other formalities. Upon termination of RWE-DEA's right to earn a fifty
percent interest in the Baltic Concession, the Company eliminated its long term
notes payable relating to RWE-DEA and recognized an extraordinary gain of
$3,076,000. The Company spudded the Gladysze #1-A, the second exploratory well
on the Baltic Concession, without RWE as a partner during the third quarter of
1997. The Gladysze #1-A was drilled to a total depth of 8,422 feet and plugged
and abandoned after no commercial quantities of oil and gas were found during
the third quarter of 1997.
Lublin Concessions. On April 16, 1997 the Company entered into an initial
agreement with Apache whereby Apache will earn a 50% interest in the Company's
Original 8 Blocks containing approximately 2.0 million acres obtained by the
Company in December 1996 by paying the Company $150,000 in cash, shooting 500
kilometers (approximately 300 miles) of 2D seismic, and drilling two exploratory
wells at Apache's sole cost. On August 1, 1997 the agreement was expanded and
modified to include the adjacent Additional 16 Blocks containing approximately
3.5 million acres that were awarded to the Company on July 18, 1997 by the
Polish government. The terms of the original agreement were modified to
include an additional cash payment of $300,000 by Apache and a commitment by
Apache to pay all of the costs to drill five additional exploratory wells, all
concession costs, all usufruct costs, and the costs of shooting approximately
1,150 kilometers of additional seismic.
Effective July 18, 1997, Apache and the Company granted the Polish Oil and
Gas Company "POGC" the right to participate in the Additional 16 Blocks on a
block by block basis. POGC may earn up to a one third interest by paying its
proportionate share of the drilling cost of the first exploratory well on each
block. Should POGC make such an election in the Additional 16 Blocks, Apache's
and the Company's interest would be reduced proportionately. The option
agreement also allows POGC to earn up to a twenty five percent interest in the
Original 8 Blocks by paying for up to twenty five percent of the cost, on a
block by block basis, of the initial exploratory well on each block. POGC's
election will proportionately reduce the Company's interest only. Should POGC
make such an election on the Original 8 Blocks, Apache has agreed to pay the
Company $40,000 for each percentage point reduction in the Company's interest as
a result of POGC's election.
In summary, in order to earn a fifty percent interest in the Company's
total of 24 Lublin area concession blocks containing approximately 5.5 million
acres, Apache has committed approximately $15,000,000 to pay: (1) the Company
$450,000 in cash, (2) the cost of drilling seven exploratory wells, (3) the cost
of shooting approximately 1,650 kilometers of seismic, (4) all concession
costs, and (5) all usufruct costs during the first three year exploration
period.
Prior to the Polish government's approval of Apache as a partner in the
Company's Lublin concession blocks, the Company recorded $65,000 received from
Apache relating to its minimum work commitment as long term debt. Upon the
Polish government's approval of Apache as a partner during the third quarter of
1997, the Company eliminated the long term debt of $65,000 and credited against
the related concession costs.
Sudety Concessions. On June 13, 1997 the Company signed a letter of intent with
Homestake to jointly explore for gold on the Company's Sudety Concession in
Poland. Homestake has the right to earn at least a seventy five percent
interest in the Sudety Concession. Upon reaching a final agreement, Homestake
has agreed to reimburse the Company for past expenditures, cover all future
exploration costs and to spend at least $500,000 per year with a minimum
commitment of $1,100,000 over a two year period.
Capital Expenditures. The Company estimates that approximately $42,800,000 will
be spent on drilling wells, leasehold, seismic data acquisition, and other costs
on the Company's properties through 1998, of which approximately $34,400,000
will be provided by industry partners and $8,400,000 provided by the Company.
The Company expects to drill another exploratory well and acquire additional
seismic data on the Company's Baltic Concession at a gross cost of approximately
$1,700,000. The net cost to the Company in the Baltic Concession will depend on
the results of recruiting a new industry participant. In the Lublin
Concessions, the Company expects to acquire additional seismic data and to drill
up to six exploratory wells at a gross cost of approximately $22,000,000, of
which an approximate amount of $2,600,000 will be provided by the Company. The
Company intends to acquire additional seismic data in the Northwest Concession
area at an approximate cost of $1,700,000 prior to drilling an initial
exploratory well and recruiting an industry participant. In the Carpathian
Concession, the Company estimates it will drill three exploratory wells and
acquire additional seismic data at an approximate gross cost of $8,600,000. The
net cost to the Company in the Carpathian Concession will depend on the final
percentage participation on the part of POGC and Apache. Through 1998, the
Company expects to spend a gross amount of approximately $8,800,000 in the
Williston Basin in North Dakota to acquire additional leasehold, seismic data
and to drill up to six exploratory wells, of which approximately $1,500,00 will
be provided by the Company.
The allocation of the Company's capital among the categories of anticipated
expenditures is discretionary and will depend upon future events that cannot be
predicted. Such events include the actual results and costs of future
exploration and development drilling activities. Consistent with previous
practice, the Company may obtain partial funding for its exploration and
potential development activities through strategic arrangements with industry or
financial partners.
In view of the continuing expansion of activities and opportunities in
Poland as discussed above, the Company is currently deferring the commitment of
capital for additional in-fill development drilling in the Cut Bank Field in
Montana and is investigating other possible means of realizing the value of this
field.
RESULTS OF OPERATIONS
Comparison of the third quarter 1997 to the third quarter 1996
Oil sales for the three months ended September 30, 1997 were $484,000 as
compared to $611,000 in the same period of 1996, a decrease of $127,000 or 20.79
percent. The decrease was attributable to the combination of lower average oil
prices ($15.39 for the third quarter of 1997 as compared to $18.22 for the third
quarter of 1996, a decrease of 15.53 percent) and declining production volumes
(31,456 barrels produced during the third quarter of 1997 as compared to 33,548
barrels produced in the third quarter of 1996, a decrease of 6.24 percent).
Drilling revenues for the three months ended September 30, 1997 were
$415,000 as compared to $3,000 in the same period of 1996, an increase of
$412,000. The Company drilled the Murray #12-30 well on its Devils' Basin
prospect in central Montana during the third quarter of 1997 utilizing its rig
#5. The Company did not drill any wells during the same period of 1996.
Future drilling revenue will vary with the timing of wells being drilled, costs
of the wells and the Company's working interest.
Operating costs for the three months ended September 30, 1997 were $226,000
as compared to $249,000 in the same period of 1996, a decrease of $23,000. The
decrease was primarily attributable to switching Company employees normally
employed in routine producing activities to drilling and completion operations.
The Company's rig #5 crew normally performs routine work on the Company's
producing properties. However, in the third quarter of 1997 the crew was pulled
off the Company's producing properties to drill the Murray #12-30 well in
central Montana utilizing the Company's rig #5. This resulted in less labor
expense being associated with Company's producing operations. Future operating
costs will fluctuate depending on whether or not the Company's rig #5 crew is
being utilized for drilling or producing operations.
Production taxes for the three months ended September 30, 1997 were $30,000
as compared to $39,000 in the same period of 1996, a decrease of $9,000. The
decrease in production taxes is associated with decreased production volumes and
prices during the third quarter of 1997.
Exploration costs for the three months ended September 30, 1997 were
$1,916,000 as compared to $333,000 in the same period of 1996, an increase of
$1,583,000. The increase is principally due to the two dry holes drilled during
the third quarter of 1997 as compared to no dry holes in the same period of
1996. The Gladysze #1-A was drilled on the Company's Baltic Concession in
Poland at a cost of $1,242,000 and the Murray #12-30 was drilled on the
Company's Devil's Basin prospect in central Montana at a cost to the Company's
interest of $211,000. The Company also incurred costs of $21,000 during the
third quarter of 1997 associated with the Mega Springs Federal #7, a wildcat
well in Nevada which was spudded in the fourth quarter of 1997 and subsequently
determined to be a dry hole.
Drilling costs for the three months ended September 30, 1997 were $178,000
as compared to $15,000 in the same period of 1996, an increase of $163,000. As
discussed above, the Murray #12-30 well was drilled utilizing the Company's
drilling rig #5 during the third quarter of 1997. The Company recorded
operating cash flow of $237,000 relating to drilling the Murray #12-30 which
offset the $211,000 dry hole cost relating to the Company's working interest in
the well. The Company's drilling rig was not utilized in drilling operations
during third quarter of 1996.
Depreciation, depletion and amortization ("DD&A") expense for the three
months ended September 30, 1997 was $161,000 as compared to $130,000 in the same
period of 1996, an increase of $31,000. The increase in DD&A was primarily due
to the depreciation of computer software, office furniture and other equipment
purchased after the third quarter of 1996. DD&A related to oil and gas
properties was essentially the same due to relatively flat production volumes.
General and administrative expenses for the three months ended September
30, 1997 were $644,000 as compared to $333,000 in the same period of 1996, an
increase of $311,000. The increase was primarily due to the additional general
and administrative expenses associated with the Company's Polish operations.
The Company's expanded Polish activity includes five separate exploration areas
in Poland as of September 30, 1997 as compared to only one exploration area, the
Baltic Concession, as of September 30, 1996.
Interest and other income for the three months ended September 30, 1997 was
$575,000 as compared to $119,000 in the same period of 1996, an increase of
$456,000. The Company received $300,000 from Apache as cash consideration in
relation to Apache's participation in the Company's Additional 16 Blocks in the
Lublin basin during the third quarter of 1997. In order for Apache to expedite
its commencement of operations in Poland, the Company assigned its ownership
interest in Lubex Petroleum Company, Sp. z o.o. ("Lubex"), a wholly owned Polish
limited liability company with the surface access rights to the Lublin
concessions, to Apache in August 1997. In connection with the transfer, the
Company also recognized a gain of $95,000 associated with inter-company loans
the Company had previously made to Lubex to fund initial start up costs which
were repaid to the Company by Apache. In return, Apache is entitled to the
Polish tax losses generated by Lubex prior to being acquired by Apache which
approximate the amount of the inter-company loans.
Interest expense for the three months ended September 30, 1997 was $1,000
as compared to $46,000 in the same period of 1996, a decrease of $45,000. The
decrease is due a lower average amount of outstanding long term debt in 1997.
The Company's long term debt of $3,583,000 at June 30, 1996 was paid off in
August 1996 using net proceeds from a public offering of common stock. The
Company also had long term debt associated with RWE-DEA of $1,500,000 as of
December 31, 1996 and received $1,576,000 in additional funding from RWE-DEA
during the nine months ended September 30, 1997. However, upon RWE-DEA's
election to not earn its concession rights on June 30, 1997, the Company
eliminated its long term debt associated with RWE-DEA and recognized an
extraordinary gain of $3,076,000. The Company also eliminated its $65,000 of
long term debt associated with Apache upon the Polish government's approval of
Apache as the Company's partner in the Lublin area concessions during the third
quarter of 1997. As of September 30, 1997, the Company has no long term debt.
RESULTS OF OPERATIONS
Comparison of the first nine months of 1997 to the first nine months of
1996
Oil sales of $1,563,000 for the first nine months of 1997 were $125,000
lower as compared to $1,688,000 for the same period of 1996. Lower production
(94,427 barrels produced for the first nine months of 1997 versus 97,664 barrels
in the same period of 1996, a decrease of 3.31 percent) combined with lower
prices ($16.55 for the first nine months of 1997 versus $17.28 in the same
period of 1996, a decrease of 4.22 percent) resulted in oil sales being 7.41
percent less for the first nine months of 1997 as compared to the same period of
1996.
Drilling revenues were $487,000 for the nine months ended September 30,
1997, $476,000 higher than the total drilling revenues of $11,000 for the same
period of 1996. During the first nine months of 1997, the Company utilized its
drilling rig #5 to drill the State #31-8 well on its Rattler Butte prospect and
the Murray #12-30 on its Devil's Basin prospect, both in central Montana. The
Company did not drill any wells during the same period of 1996. Future
drilling revenue will vary with the timing of wells being drilled, costs of the
wells and the Company's working interest.
Operating costs of $777,000 for the first nine months of 1997 were
essentially flat as compared to $798,000 for the same period of 1996. During
the first quarter of 1997, operating costs were $354,000, an abnormally high
amount due to severe weather in northern Montana. However, production and
operating costs decreased to $198,000 in the second quarter of 1997 and $226,000
in the third quarter of 1997 due to improved weather conditions and the shifting
of the rig #5 crew from normal operational activities to drilling activities in
central Montana. Future operating costs will fluctuate depending on whether
or not the Company's rig #5 crew is being utilized for drilling or producing
operations.
Production taxes were $108,000 for the nine months ended September 30,
1997, $6,000 lower than the total production taxes of $114,000 for the same
period of 1996. The decrease is directly attributable to lower production
volumes and prices during the first nine months of 1997.
Exploration costs were $4,112,000 for the nine months ended September 30,
1997, $3,384,000 higher than the total exploration costs of $728,000 for the
same period of 1996. The increase is principally due to three dry holes costing
a total of $3,287,000 drilled during the first nine months of 1997. During the
first quarter of 1997 the Company drilled the Orneta #1 on its Baltic Concession
at a cost of $1,834,000. In the third quarter of 1997 the Company drilled the
Gladysze #1-A on its Baltic concession at a cost of $1,242,000 and the Murray
#12-30 in central Montana at a cost of $211,000.
Drilling costs were $312,000 for the nine months ended September 30, 1997,
$271,000 higher than the total drilling costs of $41,000 for the same period of
1996. The increase is directly associated with the drilling of the State #31-8
well on the Company's Rattler's Butte Prospect and the Murray #12-30 on the
Company's Devil's Basin prospect, both in central Montana, during the first nine
months of 1997. The Company recorded operating cash flow of $220,000 relating to
drilling the State #31-8 well and the Murray #12-30 well during the same period
of 1997. The operating cash flow of $220,000 helped offset $24,000 relating to
the working interest cost of the State #31-8, a producing well, and $211,000
relating to the Murray #12-30, a dry hole. The Company's drilling rig #5 was
not utilized for drilling exploratory wells with third party owners in the same
period of 1996.
Depreciation, depletion and amortization ("DD&A") expense was $469,000 for
the nine months ended September 30, 1997, $64,000 higher than the total DD&A
expense of $405,000 for the same period of 1996. The increase in DD&A was
primarily due to computer software, office furniture, and other equipment
additions totaling $377,000 acquired after September 30, 1996. DD&A relating to
oil and gas properties was essentially the same due to relatively flat
production volumes.
General and administrative expenses were $1,893,000 for the nine months
ended September 30, 1997, an increase of $834,000 over the total general and
administrative expense amount of $1,059,000 for the same period of 1996. The
increase was primarily due to the additional general and administrative expenses
associated with the Company's Polish operations. The Company's expanded Polish
activity includes five separate exploration areas in Poland as of September 30,
1997 as compared to only one exploration area, the Baltic Concession, as of
September 30, 1996.
Interest and other income for the nine months ended September 30, 1997 was
$967,000, an increase of $791,000, as compared to interest and other income of
$176,000 for the same period of 1996. The first nine months of 1997 resulted in
increased interest income over the same period of 1996 due to substantially
higher average invested cash balances resulting from the Company's public stock
offering during the third quarter of 1996. Also, the Company recorded a net
gain of $395,000 relating to Apache acquiring a fifty percent interest in the
Company's Lublin area concessions in Poland during the third quarter of 1997.
Interest expense was $83,000 for the nine months ended September 30, 1997,
a decrease of $135,000 as compared to the interest expense amount of $218,000
for the same period of 1996. The decrease is primarily due a lower average
outstanding amount of long term debt in 1997. The Company's long term debt of
$3,583,000 at June 30, 1996 was paid off in August 1996 using net proceeds from
a public stock offering. The Company had long term debt associated with RWE-DEA
of $1,500,000 as of December 31, 1996 and received $1,576,000 in additional
funding from RWE-DEA during the nine months ended September 30, 1997. However,
upon RWE-DEA's election to not earn its concession rights on June 30, 1997, the
Company eliminated its long term debt associated with RWE-DEA and recognized an
extraordinary gain of $3,076,000. The Company also eliminated its $65,000 of
long term debt associated with Apache upon the Polish government's approval of
Apache as the Company's partner in the Lublin area concessions during the third
quarter of 1997. As of September 30, 1997, the Company no longer has any long
term debt.
OTHER MATTERS
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. This statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly-held common stock or potential common
stock. This statement simplifies the standards for computing EPS and makes them
comparable to international EPS standards. This statement is effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company is currently evaluating the impact of the recently issued
statement and will adopt the requirements for the year ending December 31, 1997.
The Company has reviewed all other recently issued, but not yet adopted,
accounting standards in order to determine their effects, if any, on the results
of operations or financial position of the Company. Based on that review, the
Company believes that none of these pronouncements will have a significant
effect on current or future earnings.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are included as part of this report:
SEC
EXHIBIT REFERENCE
NUMBER NUMBER TITLE OF DOCUMENT LOCATION
- ------- --------- ----------------------------------- -------------
Item 10. Material Contracts
- ----------------------------------------
10.01 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and Apache Poland Sp. zo.o. and
FX Energy Poland Sp. z.o.o. (East),
commercial partnership dated October
14, 1997, related to concession blocks
257, 258, 277, 278, 297, 317, and 318
in the Lublin area of Poland
10.02 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and Apache Poland Sp. zo.o. and
FX Energy Poland Sp. z.o.o. (East),
commercial partnership dated October
14, 1997, related to concession block
298, in the Lublin area of Poland
10.03 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and FX Energy Poland Sp. zo.o.
and Partners, commercial partnership
dated October 30, 1997, related to
concession blocks 85, 86, 87, 88, 89,
105,108, 109, 129, and 149, in
northwestern Poland
10.04 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and Apache Poland Sp. zo.o. and
FX Energy Poland Sp. z.o.o. (East),
commercial partnership dated October
14, 1997, related to concession blocks
319, 320, 339, 340, 340A, 359, 360
360A, 379, 380, and 380A, in the
Lublin area of Poland
10.05 10 Mining Usufruct Agreement between the This Filing
State Treasury of the Republic of
Poland and Gasex Production Company
Sp. zo.o. and Company, commercial
partnership dated October 14, 1997,
related to concession blocks 410, 411,
412, 413, 414, 415, 430, 431, 432,
433, 452 and 453, in southern Poland
10.06 10 Earn-In and Exploration Letter of Intent This Filing
dated June 1,3 1997, between FX
Energy, Inc., and Homestake Mining
Company of California
10.07 10 Option Agreement dated July 18, 1997, This Filing
between Polish Oil and Gas Company, FX
Energy, Inc., and Apache Overseas,
Inc.
Item 27. Financial Data Schedule
- ----------------------------------------
27.01 27 Financial Data Schedule This Filing
(1) Incorporated by reference from the current report on Form 8-K dated April
4, 1997.
(B) REPORTS ON FORM 8-K.
During the quarter ended September 30, 1997, the Company filed the
following reports on Form 8-K:
DATE OF EVENT REPORTED ITEM REPORTED
- ---------------------- ----------------------
July 1, 1997 Item 5. Other Events
July 9, 1997 Item 5. Other Events
July 14, 1997 Item 5. Other Events
July 22, 1997 Item 5. Other Events
August 6, 1997 Item 5. Other Events;
Item 7. Financial Statements and
Exhibits
September 2, 1997 Item 5. Other Events
September 11, 1997 Item 5. Other Events
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FX ENERGY, INC.
Date: November 13, 1997 By /s/ David N. Pierce
Chief Executive Officer, President,
Chief Financial and Accounting Officer,
and Director
MINING USUFRUCT AGREEMENT
With Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
Between
THE STATE TREASURY
OF THE REPUBLIC OF POLAND
And
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (EAST),
commercial partnership
This Agreement is entered into this 14th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister')
and
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (EAST), COMMERCIAL
PARTNERSHIP, a Polish commercial partnership, with its seat at Wal Miedzeszyuski
646, 03994 Warszawa, Poland, entered into the Commercial Register kept by the
District Court in Warsaw, under number 317 (herein the "Partnership"),
represented by Mr. David N. Pierce.
WHEREAS, the Partnership desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Partnership, through its partners and their parent company, has the
experience, financial and technical ability and resources, and professional
expertise efficiently to explore for, develop and exploit Natural Gas and Oil in
the Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1"Block" means any of the areas specified in Schedule "A". At the
effective date of this Agreement there are seven (7) Blocks,
identified in Schedule "A" hereto as Blocks 257, 258, 277, 278, 297,
317, and 318.
1.2.2 "Concession" means an Exploration Concession or an Exploitation
Concession.
1.2.3 "Exploration Concession" means the Concession granted under the
Geological and Mining Law for the Prospecting for and Exploration of
Natural Gas and Oil of the type referred to in Article 15.2 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Natural Gas and Oil
of the type referred to in Article 15.2 of the Geological and Mining
Law.
1.2.5 'Concession Effective Date" as to any particular Concession means
the date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations covered by
the applicable Concession.
1.2.7 "Exploitation Period" means the thirty (30) years beginning on the
Concession Effective Date of the last Exploitation Concession for
which the Partnership has duly applied prior to the end of the
Exploration Period, and with respect to any individual Mining Area
from which Natural Gas or Oil in paying quantities is then being
recovered, such Exploitation Period can be extended upon the
Partnership's request so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.8 "Exploration Period" means the First 3-Year Exploration Period and
the Second 3-Year Exploration Period.
1.2.9 "First 3-Year Exploration Period" means the three (3) years beginning
on the Concession Effective Date of the last Exploration Concession
issued to the Company for all eight (8) Blocks specified in Schedule
"A"
1.2.10 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year
Exploration Period.
1.2.11 "Mining Usufruct Area " means the Block or Blocks described in
Schedule "A" excluding any portion thereof which is subject to third
party mining usufruct regarding Oil and Gas, as more specifically
described in Schedule B, and excluding any portion thereof in respect
of which the Partnership's rights hereunder are from time to time
relinquished or surrendered by the Partnership.
1.2.12 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or
extraction.
1 2.13 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.14 "Natural Gas" or "Gas" means hydrocarbons that are in a gaseous
state under normal atmospheric conditions of temperature and pressure,
including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the
condensation or extraction of liquid hydrocarbons from gas, but
excluding condensed or extracted liquid hydrocarbons.
1.2.15 "Parties" means the Treasury and the Partnership, and "Party " means
either of the Parties.
1.2.16 "Geological and Mining Law" means the Act of February 4th, 1994.
ARTICLE II
ESTABLISMENT OF MINING USUFRUCT
2.l The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for,
Exploration and Exploitation of Natural Gas and Oil. Such right is of an
exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to each Block is subject to the Partnership obtaining an
Exploration Concession covering such Block. The mining usufruct regarding
the Exploitation with respect to any area is subject to the Partnership
obtaining an Exploitation Concession covering such area. The Minister
agrees to use its best efforts leading to the issuance of eight Exploration
Concessions covering all the eight (8) Blocks and leading to the issuance
of Exploitation Concessions which may be requested by the Partnership from
time to time, and to the designation and approval of Mining Area
boundaries.
ARTICLE III
GRANT OF RIGHTS AND EFFECTIVENESS
This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Partnership if any of
the eight Exploration Concessions referred to in Article 2.2 is not granted
within four (4) months after the Partnership submits the concession application.
3.2 The Partnership shall submit application for Exploration Concessions within
ninety (90) days from the date hereof.
3.3 This Agreement shall terminate if no Exploration Concession is granted, or
upon the expiry or withdrawal of the last Concession granted to the
Partnership within the Mining Usufruct Area, or as otherwise provided by
law and in Article 3.5 below.
3.4 Subject to this Article, the duration of this Agreement shall be for so
long as any Concession granted to the Partnership within the Mining
Usufruct Area remains in effect.
3.5 In order to ensure that certain rights of Polish Oil and Gas Company S.A.
in Warsaw (POGC) are protected, the following provisions shall apply:
3.5.1 Within twelve ( 12) months from the date hereof the Partnership shall
submit to the Minister
a. an agreement between the Partnership or its partners or their
controlling entities and POGC which shall specify the terms of
accession by POGC to the activities performed hereunder, together
with a statement by POGC confirming that in connection with
entering into such agreement POGC agrees to the Prospecting,
Exploration and Exploitation of Oil and Gas within the Mining
Usufruct Area by the Partnership; or
b. a written statement by POGC including its consent to the conduct
by the Partnership of the aforesaid activity without
participation of POGC.
3.5.2 Failing the documents specified in Article 3.5.1, the Treasury may
terminate this Agreement, with respect to the whole or a part of the
Mining Usufruct Area by 30 day written notice. In such a case:
a. the Minister shall withdraw all or some of the Concessions, as
appropriate; and
b. the Partnership's obligations hereunder regarding the conduct of
work or payments which have not been fulfilled prior to the
serving of the termination notice shall cease.
ARTICLE IV
WORK PROGRAM
4.1 The Partnership will commence its work program not later than thirty (30)
days after the beginning of the Exploration Period.
4.2 Geological and Geophysical Evaluation
The Partnership will carry out and complete a regional evaluation during
the First 3-Year Exploration Period which shall cover one or more Blocks.
This evaluation will include the following:
a. Analysis, interpretation and reprocessing of existing seismic
data
b. Analysis of existing well log data
c. Integration and evaluation of seismic, log, gravity and magnetic
data
d. Identification of structural and stratigraphic traps
e. Identification and analysis of potential reservoir rock
characteristics
f. Determination of appropriate drilling, completion and production
techniques
g. Acquisition of 2-D seismic data over 500 km of seismic lines.
4.3 During the First 3-Year Exploration Period the Partnership shall drill two
(2) exploratory wells to a depth of approximately 2,000 to 3,000 meters, as
necessary to test a Carboniferous/Devonian objective. The first two wells
may be located anyplace within the Mining Usufruct Area at the discretion
of the Partnership.
4.4 Unless the Partnership has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period,
then during the Second 3-year Exploration Period the Partnership will drill
at least one well in each of the Blocks, excluding the Blocks which have
been relinquished on or before the end of the First 3-Year Exploration
Period and the Blocks in which a well was drilled during the First 3-Year
Exploration Period. Each of such wells shall be drilled to the depth
necessary to test a Carboniferous/Devonian objective, which is estimated to
be 2,000 to 3,000 meters.
4.5 Conducing seismic acquisition or drilling on territories adjacent to
existing mining establishments shall require coordination with the
operation program of such establishments.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Partnership may discover Natural Gas
and Oil deposits which it believes can be extracted profitably, in which
such case the Partnership shall prepare appropriate documents and request:
5.1.1 approval of the Geological Documentation by the appropriate agency of
the state geological administration; and
5.1.2 an Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Natural Gas and Oil demonstrated by available seismic, gravity and well
data.
5.3 The Partnership shall have the right to extract and exploit Natural Gas and
Oil upon approval of Geological Documentation and issuance of the relevant
Exploitation Concession.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Partnership from the
Mining Usufruct Area shall pass to the Partnership at the wellhead.
6.3 Area the Concession Effective Date of an Exploration Concession, the
Partnership will have access to and the right to copy, free of cost other
than reasonable costs of reproduction and handling, all geological,
geophysical, geochemical, drilling, engineering, well log, and other
information and data relating to Natural Gas and Oil owned or possessed by
the Treasury or the Minister in relation to the Block covered by such
Exploration Concession.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Exploration Period the Partnership shall relinquish
all of the lands within the Mining Usufruct Area which are not within
the boundaries of any Mining Areas that have been designated for
Exploitation in connection with the issuance of an Exploitation
Concession or duly applied by the Partnership for such designation.
7.1.2 The Partnership may relinquish all or part of the Mining Usufruct
Area at the end of the First 3-Year Exploration Period or at any time
during the Second 3-Year Exploration Period subject to fulfillment of
any accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the end of the
relevant period, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment in accordance with the aforementioned criteria relating to
size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the Concessions and is to provide all
capital, machinery, equipment, technology and personnel necessary for the
conduct of Concession Operations.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum
industry practices as designed to permit the economic, efficient and safe
exploration for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for and
insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the
Partnership such general information as may be reasonably required by
the Partnership for planning and executing projects incidental to
Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan. The Partnership shall
also notify the Minister in advance (two months in advance, if possible) of
abandonment of any wells that have been in production. In the event such
advance notice is not practical, or in the event of emergency, the
Partnership shall notify the Minister within forty-eight (48) hours
following such event.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and the
maps, sections and other documents related thereto;
8.5.2 one set of ail geophysical recordings, measurements and reports, with
all maps profiles, sections, interpretations, studies, and other
documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs representing the
lithology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples, fluids and other
materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in final
form produced by or for the Partnership in connection with Concession
Operations.
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail, and at such time as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder,
provided, however, that the Minister's requests for such reports shall not
interfere unreasonably with the Partnership's ability to carry out
Concession Operations efficiently or necessitate any undue expense.
Pursuant to the above mentioned determination, the Partnership shall submit
annually to the Minister a report of the progress of the work and a short
memorandum of the results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the Partnership's capital structure, petition for
bankruptcy, restructuring of debt, or liquidation. The Minister may request
any necessary clarification in these matters.
ARTICLE IX
PROTECTION OF THE ENVIRONMENT--SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating
to the protection of the environment, including but not necessarily limited
to the following:
9.1.1 The Partnership shall in particular take all commercially reasonable
steps required by Polish law and good international petroleum industry
practice to:
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste of
Natural Gas and Oil or ground water discovered in or produced
from the Mining Usufruct Area
c. prevent damage to Natural Gas and Oil or ground water bearing
strata; and
d. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9.1.2 If there is a release of Natural Gas or Oil or other material on
land, fresh water, or any other form of pollution or other harm to
fresh water, land, animal life or flora as a result of Concession
Operations, the Partnership shall promptly take all necessary measures
to control the pollution, to clean up any Natural Gas and Oil or
released material, or to repair, to the extent commercially feasible,
any damage resulting from such circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the
Minister immediately and shall take such action as may be prescribed
by the appropriate governmental authority and otherwise act in
accordance with good international petroleum industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINTNG
10.1 Subject to the applicable provisions of law, the Partnership shall be free
to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate for
Polish citizens. employed directly or indirectly in the Concession
Operations during term of this Agreement.
10.3 Notwithstanding the above, the Partnership will spend US $25,000 per year
during the Exploration Period on training of Polish citizens, as directed
by the Minister. The amounts and kinds of such expenditures thereafter
shall be determined from time to time by further agreement between the
Partnership and the Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer ail or part of its
rights and obligations under this Agreement to any affiliate or third
party, subject to the requirement that the Partnership obtain the prior
written consent of the Treasury, which consent shall not be unreasonably
withheld or delayed provided that the Minister shall be satisfied that any
such assignee shall be technically and financially able to carry out the
terms and conditions of this Agreement.
11.2 A change of the legal persons who from the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury shall
be excused in the event such performance is delayed or prevented by acts of
Force Majeure. Acts of Force Majeure are events beyond the reasonable
control of the Party claiming to be affected by any such event, which have
not been brought about at its insistence and include, but are not limited
to, war, insurrection, riot, civil disorder, embargo, blockade, explosion,
fire, lightening, earthquake or other adverse weather conditions, strikes,
non-availability of equipment or any other event of a similar nature,
whether or not of the same type or kind. The foregoing is based on the
proviso, however, that the Partnership or the Treasury, as the case may be,
shall be required to use reasonable diligence to seek to overcome the
obstacle and resume performance within a reasonable time after the obstacle
is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected shall
notify forthwith the other Party thereof in writing stating the cause, and
the Parties shall do all that is reasonably within their power to remove
such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on sixty (60)
days' notice to the Minister.
13.2 In the event the Partnership takes an action or fails to take an action
which results in a material breach of this Agreement, then within ninety
(90) days of receiving written notice from the Minister of such alleged
material breach the Partnership shall take action reasonably intended to
remedy such alleged breach. If within the time allowed the Partnership
fails to take remedial action, then this Agreement may be terminated by the
Minister on behalf of the Treasury on sixty (60) days' written notice.
13.3 Should the Partnership dispute the existence of circumstances in Article
13.2, the Partnership may refer the dispute at any time before the end of
ninety (90) days after receipt of the notice of termination from the
Minister to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall not take effect
except under the terms of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without prejudice to
any right which may have accrued to the Treasury or the Partnership under
the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in connection
with this Agreement, including, without limitation, any dispute as to the
validity, construction, enforceability or breach of this Agreement shall be
exclusively and finally settled by arbitration, and any Party may submit
such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third arbitrator
appointed pursuant to Article 14.2 shall not be a national of Poland or of
the same nationality as the main shareholder(s) of Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties' be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all purposes;
and
14.4.3 the decision of the majority of the arbitrators shall be final and
binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their performance of
this Agreement unless it is impossible to do so for reason of Force Majeure
or unless the Partnership's rights hereunder have been expropriated,
nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined by the
arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
immunity from service of process, immunity from jurisdiction of any court,
and immunity of such of its property as is of a commercial nature from
execution.
ARTICLE XV
GOVERNING LAW AND STABLIZATION
15.1 This Agreement shall be governed by the laws of Poland and international
treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the Partnership
has entered into this Agreement in reliance on the Polish law as in
existence on the date the Partnership executes this Agreement, particularly
the laws and ordinances relating to royalties, taxation, the export of Oil,
the sale of Natural Gas, and the repatriation of profits. The Minister on
behalf of the Treasury hereby represents that all rights granted to the
Partnership hereunder are in conformity with Polish law as in effect on the
date the Partnership executes this Agreement, as such law applies to the
Partnership. In the event that any change to the law of Poland occurs or
the Government takes any other action which restricts, divests or limits
any rights or benefits accruing to the Partnership or which increases the
Partnership's obligations or costs of operation under this Agreement or
under the law of Poland, the Partnership may, at any time thereafter so
notify the Minister in writing. Promptly upon receipt of such notice, the
Minister and the Partnership shall meet to negotiate in good faith and
agree upon the modifications which need to be made to the terms of this
Agreement to restore the Partnership's rights and benefits to a level equal
to what they would have been had such change not occurred, or upon such
other remedy as they agree may be appropriate. In the event the Parties are
unable to agree within ninety (90) days after the Partnership's notice to
the Minister upon the modifications which are needed to the Agreement or
upon such other remedy as may be required, then either Party may at any
time thereafter refer the matter or matters in dispute to arbitration
pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as follows:
16.1.1 As mining usufruct fee with respect to the Prospecting and
Exploration for the eight Blocks, the Partnership shall pay the Polish
zloty equivalent of the following amounts:
a. US$ 22,000 within 60 days from obtaining the seven Exploration
Concessions;
b. US$ 45,000 within one year from obtaining the seven Exploration
Concessions; and
c. US$ 45,000 within two years from obtaining the seven Exploration
Concessions
16.1.2 Moreover, the Partnership will be obligated to pay the Treasury a
mining usufruct fee with respect to Exploitation in Zlotys based on
the market value of the reserves in place. The fee will be negotiated
by the Treasury and the Partnership within the range of 0.01 to 0.5
per mil of market value of the reserves in place as determined in
accordance with standard international petroleum industry engineering
criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted using
conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining Area at
the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments, commencing on
the date such Mining Area is designated and the applicable
Exploitation Concession is issued.
16.1.3 The mining usufruct fee shall be paid to the following bank account:
Ministry of Environmental Protection, Natural Resources and Forestry
Biuro Administracyjno-Budzetowe
NBP 0/0 Warszawa
account # 10101010-680-223-1
title: 28.31.3996 S 64 - mining usufruct fee;
or such other account as the Minister may notify to the Partnership in
writing.
16.2 The concession fee referred to in Article 85 of the Geological and Mining
Law of February 4, 1994 shall amount to the zloty equivalent of US $12.500
per each Exploration Concession covering one Block, payable in full within
sixty (60) days from obtaining the Exploration Concession. Sixty percent
(60%) of the fee shall constitute the revenue of the local authorities on
whose territory the activities under the Concession are to be conducted and
the remaining forty percent (40%) shall constitute the revenue of the
National Fund for Environmental Protection and Water Management.
16.3 The Partnership envisages that it will spend the equivalent of US
$5,000,000 during the First 3-Year Exploration Period and US$ 10,000,000
during the Second 3-Year Exploration Period, subject to positive results of
the first phase of exploration.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury shall
remain responsible to the Partnership for all of its obligations to the
Partnership as provided herein.
17.3 The Minister shall notify the Partnership in writing of its naming of the
Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wroblewski, Vice-Director
or the Minister: Department of Geology and Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street, 00-922 Warsaw
Facsimile: 25-15-03
for the
Partnership: David N. Pierce
Apache Poland Sp. z o.o. and FX Energy Poland
Sp. Zo.o. (East), Commercial Partnership
Wal Miedzeszynski 646,
03-994 Warszawa Poland
Facsimile: 671-66-4O, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the Polish
language, shall be effective when delivered, if delivered during business hours
of working days; if received outside business hours such notices shall be
effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state authorities.
Such plenipotentiary shall be authorized to act on behalf of the Partnership in
any matters regarding this Agreement. The first such plenipotentiary shall be
Mr. David N. Pierce. Any removal of plenipotentiary and appointment of a new one
shall require a written notice to the Minister.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 14th day of October, 1997.
The Minister of Environmental Protection,
Natural Resources and Forestry
of The Republic of Poland.
/s/ Krzysztof Szamalek, Secretary of State
Apache Poland Sp. z o.o. and FX Energy Poland Sp. z o.o (East), Commercial
Partnership
/s/ David N. Pierce
SCHEDULE "A"
MAP AND COORDINATES OF THE MINING USUFRUCT AREA
In the event of conflict between the coordinates specified below and the map
attached hereto, the coordinates shall control.
The Mining Usufruct Area shall include the following Blocks:
Block 257 E 22. 00' 00" N 52. 00' 00"
E 22. 30' 00" N 52. 00' 00"
E 22. 00' 00" N 51. 45' 00"
E 22. 30' 00" N 51. 45' 00"
Block 258 E 22. 30' 00" N 52. 00' 00"
E 23. 00' 00" N 52. 00' 00"
E 22. 30' 00" N 51. 45' 00"
E 23. 00' 00" N 51. 45' 00"
Block 277 E 22. 00' 00" N 51. 45' 00"
E 22. 30' 00" N 51. 45' 00"
E 22. 00' 00" N 51. 30' 00"
E 22. 30' 00" N 51. 30' 00"
Block 278 E 22. 30' 00" N 51. 45' 00"
E 23. 00' 00" N 51. 45' 00"
E 22. 30' 00" N 51. 31' 00"
E 23. 00' 00" N 51. 30' 00"
Block 297 E 22. 00' 00" N 51. 30' 00"
E 22. 30' 00" N 51. 30' 00"
E 23. 00' 00" N 51. 15' 00"
E 23. 30' 00" N 51. 15' 00"
Block 317 E 22. 00' 00" N 51. 15' 00"
E 22. 30' 00" N 51. 15' 00"
E 22. 00' 00" N 51. 00' 00"
E 22. 30' 00" N 51. 00' 00"
Block 318 E 22. 30' 00" N 51. 15' 00"
E 23. 00' 00" N 51. 15' 00"
E 22. 30' 00" N 51. 00' 00"
E 23. 00' 00" N 51. 00' 00"
Excluding the following existing concession ares: Melgiew, Glinnik, Ryki-Zyrzyn
and Zelechow-Kock, as more specifically described in Schedules B, C, D, and E,
respectively. However, the areas so excluded may be subject to Exploitation
Concessions issued to the Partnership in the future, provided that the third
party rights thereto shall have by then expired or shall have been acquired by
the Partnership; in this case such areas shall be part of the Mining Usufruct
Area.
[Attached is outline map of section of Poland in which concessions are located
containing grid of concession boundaries and numbers]
Schedule B
[Description of certain parcels excluded from concessions described]
Schedule C
[Description of certain parcels excluded from concessions described]
Schedule D
[Description of certain parcels excluded from concessions described]
Schedule E
[Description of certain parcels excluded from concessions described]
MINING USUFRUCT AGREEMENT
With Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
Between
THE STATE TREASURY
OF THE REPUBLIC OF POLAND
And
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (East),
commercial partnership
This Agreement is entered into this 14th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister")
and
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (EAST), COMMERCIAL
PARTNERSHIP, a Polish commercial partnership, with its seat at Wal Miedzeszyuski
646, 03994 Warszawa, Poland, entered into the Commercial Register kept by the
District Court in Warsaw, under number 317 (herein the "Partnership"),
represented by Mr. David N. Pierce.
WHEREAS, the Partnership desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Partnership, through its partners and their parent company, has the
experience, financial and technical ability and resources, and professional
expertise efficiently to explore for, develop and exploit Natural Gas and Oil in
the Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means any of the areas specified in Schedule "A". At the
effective date of this Agreement there is one (1) Block, identified in
Schedule "A" hereto as Block 298.
1.2.2 "Concession" means an Exploration Concession or an Exploitation
Concession.
1.2.3 "Exploration Concession" means the Concession granted under the
Geological and Mining Law for the Prospecting for and Exploration of
Natural Gas and Oil of the type referred to in Article 15.2 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Natural Gas and Oil
of the type referred to in Article 15.2 of the Geological and Mining
Law.
1.2.5 "Concession Effective Date" as to any particular Concession means
the date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations covered
by the applicable Concession.
1.2.7 "Exploitation Period" means the thirty (30) years beginning on the
Concession Effective Date of the last Exploitation Concession for
which the Partnership has duly applied prior to the end of the
Exploration Period, and with respect to any individual Mining Area
from which Natural Gas or Oil in paying quantities is then being
recovered, such Exploitation Period can be extended upon the
Partnership's request so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.8 "Exploration Period" means the First 3-Year Exploration Period and
the Second 3-Year Exploration Period.
1.2.9 "First 3-Year Exploration Period" means the three (3) years
beginning on the Concession Effective Date of the last Exploration
Concession issued to the Company for all eight (8) Blocks specified in
Schedule "A"
1.2.10 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year
Exploration Period.
1.2.11 "Mining Usufruct Area " means the Block or Blocks described in
Schedule "A" excluding any portion thereof which is subject to third
party mining usufruct regarding Oil and Gas, as more specifically
described in Schedule B, and excluding any portion thereof in respect
of which the Partnership's rights hereunder are from time to time
relinquished or surrendered by the Partnership.
1.2.12 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or
extraction.
1 2.13 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.14 "Natural Gas" or "Gas" means hydrocarbons that are in a gaseous
state under normal atmospheric conditions of temperature and pressure,
including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the
condensation or extraction of liquid hydrocarbons from gas, but
excluding condensed or extracted liquid hydrocarbons.
1.2.15 "Parties" means the Treasury and the Partnership, and "Party "
means either of the Parties.
1.2.16 "Geological and Mining Law" means the Act of February 4th, 1994.
ARTICLE II
ESTABLISMENT OF MINING USUFRUCT
2.l The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for,
Exploration and Exploitation of Natural Gas and Oil. Such right is of an
exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to each Block is subject to the Partnership obtaining an
Exploration Concession covering such Block. The mining usufruct regarding
the Exploitation with respect to any area is subject to the Partnership
obtaining an Exploitation Concession covering such area. The Minister
agrees to use its best efforts leading to the issuance of eight Exploration
Concessions covering all the eight (8) Blocks and leading to the issuance
of Exploitation Concessions which may be requested by the Partnership from
time to time, and to the designation and approval of Mining Area
boundaries.
ARTICLE III
GRANT OF RIGHTS AND EFFECTIVENESS
This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Partnership if any of
the eight Exploration Concessions referred to in Article 2.2 is not granted
within four (4) months after the Partnership submits the concession application.
3.2 The Partnership shall submit application for Exploration Concessions within
ninety (90) days from the date hereof.
3.3 This Agreement shall terminate if no Exploration Concession is granted, or
upon the expiry or withdrawal of the last Concession granted to the
Partnership within the Mining Usufruct Area, or as otherwise provided by
law and in Article 3.5 below.
3.4 Subject to this Article, the duration of this Agreement shall be for so
long as any Concession granted to the Partnership within the Mining
Usufruct Area remains in effect.
3.5 In order to ensure that certain rights of Polish Oil and Gas Company S.A.
in Warsaw (POGC) are protected, the following provisions shall apply:
3.5.1 Within twelve ( 12) months from the date hereof the Partnership
shall submit to the Minister
a. an agreement between the Partnership or its partners or their
controlling entities and POGC which shall specify the terms of
accession by POGC to the activities performed hereunder, together
with a statement by POGC confirming that in connection with
entering into such agreement POGC agrees to the Prospecting,
Exploration and Exploitation of Oil and Gas within the Mining
Usufruct Area by the Partnership; or
b. a written statement by POGC including its consent to the conduct
by the Partnership of the aforesaid activity without
participation of POGC.
3.5.2 Failing the documents specified in Article 3.5.1, the Treasury
may terminate this Agreement, with respect to the whole or a part of
the Mining Usufruct Area by 30 day written notice. In such a case:
a. the Minister shall withdraw all or some of the Concessions, as
appropriate; and
b. the Partnership's obligations hereunder regarding the conduct of
work or payments which have not been fulfilled prior to the
serving of the termination notice shall cease.
ARTICLE IV
WORK PROGRAM
4.1 The Partnership will commence its work program not later than thirty (30)
days after the beginning of the Exploration Period.
4.2 Geological and Geophysical Evaluation
The Partnership will carry out and complete a regional evaluation during
the First 3-Year Exploration Period which shall cover one or more Blocks.
This evaluation will include the following:
a. Analysis, interpretation and reprocessing of existing seismic
data
b. Analysis of existing well log data
c. Integration and evaluation of seismic, log, gravity and magnetic
data
d. Identification of structural and stratigraphic traps
e. Identification and analysis of potential reservoir rock
characteristics
f. Determination of appropriate drilling, completion and production
techniques
g. Acquisition of 2-D seismic data over 500 km of seismic lines.
4.3 During the First 3-Year Exploration Period the Partnership shall drill two
(2) exploratory wells to a depth of approximately 2,000 to 3,000 meters, as
necessary to test a Carboniferous/Devonian objective. The first two wells
may be located anyplace within the Mining Usufruct Area at the discretion
of the Partnership.
4.4 Unless the Partnership has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period,
then during the Second 3-year Exploration Period the Partnership will drill
at least one well in each of the Blocks, excluding the Blocks which have
been relinquished on or before the end of the First 3-Year Exploration
Period and the Blocks in which a well was drilled during the First 3-Year
Exploration Period. Each of such wells shall be drilled to the depth
necessary to test a Carboniferous/Devonian objective, which is estimated to
be 2,000 to 3,000 meters.
4.5 Conducing seismic acquisition or drilling on territories adjacent to
existing mining establishments shall require coordination with the
operation program of such establishments.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Partnership may discover Natural Gas
and Oil deposits which it believes can be extracted profitably, in which
such case the Partnership shall prepare appropriate documents and request:
5.1.1 approval of the Geological Documentation by the appropriate
agency of the state geological administration; and
5.1.2 an Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Natural Gas and Oil demonstrated by available seismic, gravity and well
data.
5.3 The Partnership shall have the right to extract and exploit Natural Gas and
Oil upon approval of Geological Documentation and issuance of the relevant
Exploitation Concession.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Partnership from the
Mining Usufruct Area shall pass to the Partnership at the wellhead.
6.3 Area the Concession Effective Date of an Exploration Concession, the
Partnership will have access to and the right to copy, free of cost other
than reasonable costs of reproduction and handling, all geological,
geophysical, geochemical, drilling, engineering, well log, and other
information and data relating to Natural Gas and Oil owned or possessed by
the Treasury or the Minister in relation to the Block covered by such
Exploration Concession.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Exploration Period the Partnership shall
relinquish all of the lands within the Mining Usufruct Area which are
not within the boundaries of any Mining Areas that have been
designated for Exploitation in connection with the issuance of an
Exploitation Concession or duly applied by the Partnership for such
designation.
7.1.2 The Partnership may relinquish all or part of the Mining Usufruct
Area at the end of the First 3-Year Exploration Period or at any time
during the Second 3-Year Exploration Period subject to fulfillment of
any accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the end of the
relevant period, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment in accordance with the aforementioned criteria relating to
size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the Concessions and is to provide all
capital, machinery, equipment, technology and personnel necessary for the
conduct of Concession Operations.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum
industry practices as designed to permit the economic, efficient and safe
exploration for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for
and insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the
Partnership such general information as may be reasonably required by
the Partnership for planning and executing projects incidental to
Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan. The Partnership shall
also notify the Minister in advance (two months in advance, if possible) of
abandonment of any wells that have been in production. In the event such
advance notice is not practical, or in the event of emergency, the
Partnership shall notify the Minister within forty-eight (48) hours
following such event.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and
the maps, sections and other documents related thereto;
8.5.2 one set of ail geophysical recordings, measurements and reports,
with all maps profiles, sections, interpretations, studies, and other
documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs representing the
lithology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples, fluids and other
materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in final
form produced by or for the Partnership in connection with Concession
Operations.
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail, and at such time as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder,
provided, however, that the Minister's requests for such reports shall not
interfere unreasonably with the Partnership's ability to carry out
Concession Operations efficiently or necessitate any undue expense.
Pursuant to the above mentioned determination, the Partnership shall submit
annually to the Minister a report of the progress of the work and a short
memorandum of the results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the Partnership's capital structure, petition for
bankruptcy, restructuring of debt, or liquidation. The Minister may request
any necessary clarification in these matters.
ARTICLE IX
PROTECTION OF THE ENVIRONMENT) SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating
to the protection of the environment, including but not necessarily limited
to the following:
9.1. 1 The Partnership shall in particular take all commercially
reasonable steps required by Polish law and good international
petroleum industry practice to:
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste of
Natural Gas and Oil or ground water discovered in or produced
from the Mining Usufruct Area
c. prevent damage to Natural Gas and Oil or ground water bearing
strata; and
d. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9. 1.2 If there is a release of Natural Gas or Oil or other material on
land, fresh water, or any other form of pollution or other harm to
fresh water, land, animal life or flora as a result of Concession
Operations, the Partnership shall promptly take all necessary measures
to control the pollution, to clean up any Natural Gas and Oil or
released material, or to repair, to the extent commercially feasible,
any damage resulting from such circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the
Minister immediately and shall take such action as may be prescribed
by the appropriate governmental authority and otherwise act in
accordance with good international petroleum industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINTNG
10.1 Subject to the applicable provisions of law, the Partnership shall be
free to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate
for Polish citizens. employed directly or indirectly in the Concession
Operations during term of this Agreement.
10.3 Notwithstanding the above, the Partnership will spend US $25,000 per
year during the Exploration Period on training of Polish citizens, as
directed by the Minister. The amounts and kinds of such expenditures
thereafter shall be determined from time to time by further agreement
between the Partnership and the Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer ail or part of its
rights and obligations under this Agreement to any affiliate or third
party, subject to the requirement that the Partnership obtain the prior
written consent of the Treasury, which consent shall not be unreasonably
withheld or delayed provided that the Minister shall be satisfied that any
such assignee shall be technically and financially able to carry out the
terms and conditions of this Agreement.
11.2 A change of the legal persons who from the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury
shall be excused in the event such performance is delayed or prevented by
acts of Force Majeure. Acts of Force Majeure are events beyond the
reasonable control of the Party claiming to be affected by any such event,
which have not been brought about at its insistence and include, but are
not limited to, war, insurrection, riot, civil disorder, embargo, blockade,
explosion, fire, lightening, earthquake or other adverse weather
conditions, strikes, non-availability of equipment or any other event of a
similar nature, whether or not of the same type or kind. The foregoing is
based on the proviso, however, that the Partnership or the Treasury, as the
case may be, shall be required to use reasonable diligence to seek to
overcome the obstacle and resume performance within a reasonable time after
the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected
shall notify forthwith the other Party thereof in writing stating the
cause, and the Parties shall do all that is reasonably within their power
to remove such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on sixty (60)
days' notice to the Minister.
13.2 In the event the Partnership takes an action or fails to take an
action which results in a material breach of this Agreement, then within
ninety (90) days of receiving written notice from the Minister of such
alleged material breach the Partnership shall take action reasonably
intended to remedy such alleged breach. If within the time allowed the
Partnership fails to take remedial action, then this Agreement may be
terminated by the Minister on behalf of the Treasury on sixty (60) days'
written notice.
13.3 Should the Partnership dispute the existence of circumstances in
Article 13.2, the Partnership may refer the dispute at any time before the
end of ninety (90) days after receipt of the notice of termination from the
Minister to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall not take effect
except under the terms of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without prejudice
to any right which may have accrued to the Treasury or the Partnership
under the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in
connection with this Agreement, including, without limitation, any dispute
as to the validity, construction, enforceability or breach of this
Agreement shall be exclusively and finally settled by arbitration, and any
Party may submit such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third
arbitrator appointed pursuant to Article 14.2 shall not be a national of
Poland or of the same nationality as the main shareholder(s) of
Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties' be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all
purposes; and
14.4.3 the decision of the majority of the arbitrators shall be final
and binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their performance
of this Agreement unless it is impossible to do so for reason of Force
Majeure or unless the Partnership's rights hereunder have been
expropriated, nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined by
the arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
immunity from service of process, immunity from jurisdiction of any court,
and immunity of such of its property as is of a commercial nature from
execution.
ARTICLE XV
GOVERNING LAW AND STABLIZATION
15.1 This Agreement shall be governed by the laws of Poland and
international treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the
Partnership has entered into this Agreement in reliance on the Polish law
as in existence on the date the Partnership executes this Agreement,
particularly the laws and ordinances relating to royalties, taxation, the
export of Oil, the sale of Natural Gas, and the repatriation of profits.
The Minister on behalf of the Treasury hereby represents that all rights
granted to the Partnership hereunder are in conformity with Polish law as
in effect on the date the Partnership executes this Agreement, as such law
applies to the Partnership. In the event that any change to the law of
Poland occurs or the Government takes any other action which restricts,
divests or limits any rights or benefits accruing to the Partnership or
which increases the Partnership's obligations or costs of operation under
this Agreement or under the law of Poland, the Partnership may, at any time
thereafter so notify the Minister in writing. Promptly upon receipt of such
notice, the Minister and the Partnership shall meet to negotiate in good
faith and agree upon the modifications which need to be made to the terms
of this Agreement to restore the Partnership's rights and benefits to a
level equal to what they would have been had such change not occurred, or
upon such other remedy as they agree may be appropriate. In the event the
Parties are unable to agree within ninety (90) days after the Partnership's
notice to the Minister upon the modifications which are needed to the
Agreement or upon such other remedy as may be required, then either Party
may at any time thereafter refer the matter or matters in dispute to
arbitration pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as
follows:
16.1.1 As mining usufruct fee with respect to the Prospecting and
Exploration for the eight Blocks, the Partnership shall pay the Polish
zloty equivalent of of US$25,500 within 60 days from obtaining the
Exploration Concession
16.1.2 Moreover, the Partnership will be obligated to pay the Treasury a
mining usufruct fee with respect to Exploitation in Zlotys based on
the market value of the reserves in place. The fee will be negotiated
by the Treasury and the Partnership within the range of 0.01 to 0.5
per mil of market value of the reserves in place as determined in
accordance with standard international petroleum industry engineering
criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted using
conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining Area at
the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments, commencing on
the date such Mining Area is designated and the applicable
Exploitation Concession is issued.
16.1.3 The mining usufruct fee shall be paid to the following bank
account:
Ministry of Environmental Protection, Natural Resources and Forestry
Biuro Administracyjno-Budzetowe
NBP 0/0 Warszawa
account # 10101010-680-223-1
title: 28.31.3996 S 64 - mining usufruct fee;
or such other account as the Minister may notify to the Partnership in
writing.
16.2 The concession fee referred to in Article 85 of the Geological and
Mining Law of February 4, 1994 shall amount to the zloty equivalent of US
$12.500 per each Exploration Concession covering one Block, payable in full
within sixty (60) days from obtaining the Exploration Concession. Sixty
percent (60%) of the fee shall constitute the revenue of the local
authorities on whose territory the activities under the Concession are to
be conducted and the remaining forty percent (40%) shall constitute the
revenue of the National Fund for Environmental Protection and Water
Management.
16.3 The Partnership envisages that it will spend the equivalent of US
$5,000,000 during the First 3-Year Exploration Period and US$10,000,000
during the Second 3-Year Exploration Period, subject to positive results of
the first phase of exploration.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury
shall remain responsible to the Partnership for all of its obligations to
the Partnership as provided herein.
17.3 The Minister shall notify the Partnership in writing of its naming of
the Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wroblewski, Vice-Director
or the Minister: Department of Geology and
Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street, 00-922 Warsaw
Facsimile: 25-15-03
for the
Partnership: David N. Pierce
Apache Poland Sp. z o.o. and FX Energy Poland
Sp. Zo.o. (East), Commercial Partnership
Wal Miedzeszynski 646,
03-994 Warszawa Poland
Facsimile: 671-66-4O, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the Polish
language, shall be effective when delivered, if delivered during business hours
of working days; if received outside business hours such notices shall be
effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state authorities.
Such plenipotentiary shall be authorized to act on behalf of the Partnership in
any matters regarding this Agreement. The first such plenipotentiary shall be
Mr. David N. Pierce. Any removal of plenipotentiary and appointment of a new one
shall require a written notice to the Minister.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 14th day of October, 1997.
The Minister of Environmental Protection,
Natural Resources and Forestry
of The Republic of Poland.
/s/ Krzysztof Szamalek, Secretary of State
Apache Poland Sp. z o.o. and FX Energy Poland Sp. z o.o (East), Commercial
Partnership
/s/ David N. Pierce
SCHEDULE "A"
MAP AND COORDINATES OF THE MINING USUFRUCT AREA
In the event of conflict between the coordinates specified below and the map
attached hereto, the coordinates shall control.
The Mining Usufruct Area shall include the following Block:
Block 298 E 22. 30' 00" N 51. 30' 00"
E 23. 00' 00" N 51. 30' 00"
E 22. 30' 00" N 51. 15' 00"
E 23. 00' 00" N 51. 15' 00"
Excluding the following existing concession ares: Melgiew, and excluding for the
purposes of Exploitation onlyh, the existing concession areas of Swidnik-
Ciecierzyn, as more paritcularly described in Schedules B and C, respectively.
However, the areas so excluded may be subject to Exploitation Concessions issued
to the Partnership in the future, provided that the third party rights thereto
shall have by then expired or shall have been acquired by the Partnership; in
this case such areas shall be part of the Mining Usufruct Area.
[Attached is outline map of section of Poland in which concessions are located
containing grid of concession boundaries and numbers]
Schedule B
[Description of certain parcels excluded from concessions described]
Schedule C
[Description of certain parcels excluded from concessions described]
MINING USUFRUCT AGREEMENT
With Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
Between
THE STATE TREASURY
OF THE REPUBLIC OF POLAND
And
FX ENERGY POLAND Sp. z o.o. and Partners
commercial partnership
This Agreement is entered into this 30th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister"), acting through Dr. Krzystof
Szmalek, Secretary of State
and
FX ENERGY POLAND SP. Z O.O. and PARTNERS, COMMERCIAL PARTNERSHIP, a Polish
commercial partnership, with its seat at Wal MiedzeszyNski 646, 03-994 Warszawa,
Poland, entered into the Commercial Register kept by the District Court in
Warsaw, under number RHA 317 (herein the "Partnership"), represented by Mr.
David N. Pierce.
WHEREAS, the Partnership desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Partnership, through its partners and their parent company, has the
experience, financial and technical ability and resources, and professional
expertise efficiently to explore for, develop and exploit Natural Gas and Oil in
the Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means any of the areas specified in Schedule "A". At the
effective date of this Agreement there are ten (10) Blocks, identified
in Schedule "A" hereto as Blocks 85, 86, 87, 88, 89, 105, 108, 109,
129 and 149.
1.2.2 "Concession" means an Exploration Concession or an Exploitation
Concession.
1.2.3 "Exploration Concession" means the Concession granted under the
Geological and Mining Law for the Prospecting for and Exploration of
Natural Gas and Oil of the type referred to in Article 15.2 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Natural Gas and Oil
of the type referred to in Article 15.2 of the Geological and Mining
Law.
1.2.5 "Concession Effective Date" as to any particular Concession means
the date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations covered
by the applicable Concession.
1.2.7 "Exploitation Period" means the thirty (30) years beginning on the
Concession Effective Date of the last Exploitation Concession for
which the Partnership has duly applied prior to the end of the
Exploration Period, and with respect to any individual Mining Area
from which Natural Gas or Oil in paying quantities is then being
recovered, such Exploitation Period can be extended upon the
Partnership's request so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.8 "Exploration Period" means the First 3-Year Exploration Period and
the Second 3-Year Exploration Period.
1.2.9 "First 3-Year Exploration Period" means the three (3) years
beginning on the Concession Effective Date of the last Exploration
Concession issued to the Company for all eight (8) Blocks specified in
Schedule "A"
1.2.10 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year
Exploration Period.
1.2.11 "Mining Usufruct Area " means the Block or Blocks described in
Schedule "A" excluding any portion thereof which is subject to third
party mining usufruct regarding Oil and Gas, as more specifically
described in Schedule B, and excluding any portion thereof in respect
of which the Partnership's rights hereunder are from time to time
relinquished or surrendered by the Partnership.
1.2.12 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or
extraction.
1 2.13 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.14 "Natural Gas" or "Gas" means hydrocarbons that are in a gaseous
state under normal atmospheric conditions of temperature and pressure,
including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the
condensation or extraction of liquid hydrocarbons from gas, but
excluding condensed or extracted liquid hydrocarbons.
1.2.15 "Parties" means the Treasury and the Partnership, and "Party "
means either of the Parties.
1.2.16 "Geological and Mining Law" means the Act of February 4th, 1994.
ARTICLE II
ESTABLISMENT OF MINING USUFRUCT
2. l The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for,
Exploration and Exploitation of Natural Gas and Oil. Such right is of an
exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to each Block is subject to the Partnership obtaining an
Exploration Concession covering such Block. The mining usufruct regarding
the Exploitation with respect to any area is subject to the Partnership
obtaining an Exploitation Concession covering such area. The Minister
agrees to use its best efforts leading to the issuance of eight Exploration
Concessions covering all the eight (8) Blocks and leading to the issuance
of Exploitation Concessions which may be requested by the Partnership from
time to time, and to the designation and approval of Mining Area
boundaries.
ARTICLE III
GRANT OP RIGHTS AND EFFECTIVENESS
This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Partnership if any of
the eight Exploration Concessions referred to in Article 2.2 is not granted
within four (4) months after the Partnership submits the concession application.
3.2 The Partnership shall submit application for Exploration Concessions within
ninety (90) days from the date hereof.
3.3 This Agreement shall terminate if no Exploration Concession is granted, or
upon the expiry or withdrawal of the last Concession granted to the
Partnership within the Mining Usufruct Area, or as otherwise provided by
law and in Article 3.5 below.
3.4 Subject to this Article, the duration of this Agreement shall be for so
long as any Concession granted to the Partnership within the Mining
Usufruct Area remains in effect.
3.5 In order to ensure that certain rights of Polish Oil and Gas Company S.A.
in Warsaw (POGC) are protected, the following provisions shall apply:
3.5.1 Within twelve ( 12) months from the date hereof the Partnership
shall submit to the Minister
a. an agreement between the Partnership or its partners or their
controlling entities and POGC which shall specify the terms of
accession by POGC to the activities performed hereunder, together
with a statement by POGC confirming that in connection with
entering into such agreement POGC agrees to the Prospecting,
Exploration and Exploitation of Oil and Gas within the Mining
Usufruct Area by the Partnership; or
b. a written statement by POGC including its consent to the conduct
by the Partnership of the aforesaid activity without
participation of POGC.
3.5.2 Failing the documents specified in Article 3.5.1, the Treasury
may terminate this Agreement, with respect to the whole or a part of
the Mining Usufruct Area by 30 day written notice. In such a case:
a. the Minister shall withdraw all or some of the Concessions, as
appropriate; and
b. the Partnership's obligations hereunder regarding the conduct of
work or payments which have not been fulfilled prior to the
serving of the termination notice shall cease.
ARTICLE IV
WORK PROGRAM
4.1 The Partnership will commence its work program not later than thirty (30)
days after the beginning of the Exploration Period.
4.2 Geological and Geophysical Evaluation
The Partnership will carry out and complete a regional evaluation during
the First 3-Year Exploration Period which shall cover one or more Blocks.
This evaluation will include the following:
a. Analysis, interpretation and reprocessing of existing seismic
data
b. Analysis of existing well log data
c. Integration and evaluation of seismic, log, gravity and magnetic
data
d. Identification of structural and stratigraphic traps
e. Identification and analysis of potential reservoir rock
characteristics
f. Determination of appropriate drilling, completion and production
techniques
g. Acquisition of 2-D seismic data over 500 km of seismic lines.
4.3 During the First 3-Year Exploration Period the Partnership shall drill two
(2) exploratory wells to a depth of approximately 2,000 to 3,000 meters, as
necessary to test a Carboniferous/Devonian objective. The first two wells
may be located anyplace within the Mining Usufruct Area at the discretion
of the Partnership.
4.4 Unless the Partnership has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period,
then during the Second 3-year Exploration Period the Partnership will drill
at least one well in each of the Blocks, excluding the Blocks which have
been relinquished on or before the end of the First 3-Year Exploration
Period and the Blocks in which a well was drilled during the First 3-Year
Exploration Period. Each of such wells shall be drilled to the depth
necessary to test a Carboniferous/Devonian objective, which is estimated to
be 2,000 to 3,000 meters.
4.5 Conducing seismic acquisition or drilling on territories adjacent to
existing mining establishments shall require coordination with the
operation program of such establishments.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Partnership may discover Natural Gas
and Oil deposits which it believes can be extracted profitably, in which
such case the Partnership shall prepare appropriate documents and request:
5.1.1 approval of the Geological Documentation by the appropriate
agency of the state geological administration; and
5.1.2 an Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Natural Gas and Oil demonstrated by available seismic, gravity and well
data.
5.3 The Partnership shall have the right to extract and exploit Natural Gas and
Oil upon approval of Geological Documentation and issuance of the relevant
Exploitation Concession.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Partnership from the
Mining Usufruct Area shall pass to the Partnership at the wellhead.
6.3 Area the Concession Effective Date of an Exploration Concession, the
Partnership will have access to and the right to copy, free of cost other
than reasonable costs of reproduction and handling, all geological,
geophysical, geochemical, drilling, engineering, well log, and other
information and data relating to Natural Gas and Oil owned or possessed by
the Treasury or the Minister in relation to the Block covered by such
Exploration Concession.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Exploration Period the Partnership shall
relinquish all of the lands within the Mining Usufruct Area which are
not within the boundaries of any Mining Areas that have been
designated for Exploitation in connection with the issuance of an
Exploitation Concession or duly applied by the Partnership for such
designation.
7.1.2 The Partnership may relinquish all or part of the Mining Usufruct
Area at the end of the First 3-Year Exploration Period or at any time
during the Second 3-Year Exploration Period subject to fulfillment of
any accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the end of the
relevant period, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment in accordance with the aforementioned criteria relating to
size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the Concessions and is to provide all
capital, machinery, equipment, technology and personnel necessary for the
conduct of Concession Operations.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum
industry practices as designed to permit the economic, efficient and safe
exploration for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for
and insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the
Partnership such general information as may be reasonably required by
the Partnership for planning and executing projects incidental to
Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan. The Partnership shall
also notify the Minister in advance (two months in advance, if possible) of
abandonment of any wells that have been in production. In the event such
advance notice is not practical, or in the event of emergency, the
Partnership shall notify the Minister within forty-eight (48) hours
following such event.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and
the maps, sections and other documents related thereto;
8.5.2 one set of ail geophysical recordings, measurements and reports,
with all maps profiles, sections, interpretations, studies, and other
documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs representing the
lithology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples, fluids and other
materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in final
form produced by or for the Partnership in connection with Concession
Operations.
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail, and at such time as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder,
provided, however, that the Minister's requests for such reports shall not
interfere unreasonably with the Partnership's ability to carry out
Concession Operations efficiently or necessitate any undue expense.
Pursuant to the above mentioned determination, the Partnership shall submit
annually to the Minister a report of the progress of the work and a short
memorandum of the results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the Partnership's capital structure, petition for
bankruptcy, restructuring of debt, or liquidation. The Minister may request
any necessary clarification in these matters.
ARTICLE IX
PROTECTION OF THE ENVIRONMENT--SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating
to the protection of the environment, including but not necessarily limited
to the following:
9.1. 1 The Partnership shall in particular take all commercially
reasonable steps required by Polish law and good international
petroleum industry practice to:
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste of
Natural Gas and Oil or ground water discovered in or produced
from the Mining Usufruct Area
c. prevent damage to Natural Gas and Oil or ground water bearing
strata; and
d. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9. 1.2 If there is a release of Natural Gas or Oil or other material on
land, fresh water, or any other form of pollution or other harm to
fresh water, land, animal life or flora as a result of Concession
Operations, the Partnership shall promptly take all necessary measures
to control the pollution, to clean up any Natural Gas and Oil or
released material, or to repair, to the extent commercially feasible,
any damage resulting from such circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the
Minister immediately and shall take such action as may be prescribed
by the appropriate governmental authority and otherwise act in
accordance with good international petroleum industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINTNG
10.1 Subject to the applicable provisions of law, the Partnership shall be
free to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate
for Polish citizens. employed directly or indirectly in the Concession
Operations during term of this Agreement.
10.3 Notwithstanding the above, the Partnership will spend US $25,000 per
year during the Exploration Period on training of Polish citizens, as
directed by the Minister. The amounts and kinds of such expenditures
thereafter shall be determined from time to time by further agreement
between the Partnership and the Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer ail or part of its
rights and obligations under this Agreement to any affiliate or third
party, subject to the requirement that the Partnership obtain the prior
written consent of the Treasury, which consent shall not be unreasonably
withheld or delayed provided that the Minister shall be satisfied that any
such assignee shall be technically and financially able to carry out the
terms and conditions of this Agreement.
11.2 A change of the legal persons who from the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury
shall be excused in the event such performance is delayed or prevented by
acts of Force Majeure. Acts of Force Majeure are events beyond the
reasonable control of the Party claiming to be affected by any such event,
which have not been brought about at its insistence and include, but are
not limited to, war, insurrection, riot, civil disorder, embargo, blockade,
explosion, fire, lightening, earthquake or other adverse weather
conditions, strikes, non-availability of equipment or any other event of a
similar nature, whether or not of the same type or kind. The foregoing is
based on the proviso, however, that the Partnership or the Treasury, as the
case may be, shall be required to use reasonable diligence to seek to
overcome the obstacle and resume performance within a reasonable time after
the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected
shall notify forthwith the other Party thereof in writing stating the
cause, and the Parties shall do all that is reasonably within their power
to remove such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on sixty (60)
days' notice to the Minister.
13.2 In the event the Partnership takes an action or fails to take an
action which results in a material breach of this Agreement, then within
ninety (90) days of receiving written notice from the Minister of such
alleged material breach the Partnership shall take action reasonably
intended to remedy such alleged breach. If within the time allowed the
Partnership fails to take remedial action, then this Agreement may be
terminated by the Minister on behalf of the Treasury on sixty (60) days'
written notice.
13.3 Should the Partnership dispute the existence of circumstances in
Article 13.2, the Partnership may refer the dispute at any time before the
end of ninety (90) days after receipt of the notice of termination from the
Minister to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall not take effect
except under the terms of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without prejudice
to any right which may have accrued to the Treasury or the Partnership
under the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in
connection with this Agreement, including, without limitation, any dispute
as to the validity, construction, enforceability or breach of this
Agreement shall be exclusively and finally settled by arbitration, and any
Party may submit such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third
arbitrator appointed pursuant to Article 14.2 shall not be a national of
Poland or of the same nationality as the main shareholder(s) of
Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties' be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all
purposes; and
14.4.3 the decision of the majority of the arbitrators shall be final
and binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their performance
of this Agreement unless it is impossible to do so for reason of Force
Majeure or unless the Partnership's rights hereunder have been
expropriated, nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined by
the arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
immunity from service of process, immunity from jurisdiction of any court,
and immunity of such of its property as is of a commercial nature from
execution.
ARTICLE XV
GOVERNING LAW AND STABLIZATION
15.1 This Agreement shall be governed by the laws of Poland and
international treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the
Partnership has entered into this Agreement in reliance on the Polish law
as in existence on the date the Partnership executes this Agreement,
particularly the laws and ordinances relating to royalties, taxation, the
export of Oil, the sale of Natural Gas, and the repatriation of profits.
The Minister on behalf of the Treasury hereby represents that all rights
granted to the Partnership hereunder are in conformity with Polish law as
in effect on the date the Partnership executes this Agreement, as such law
applies to the Partnership. In the event that any change to the law of
Poland occurs or the Government takes any other action which restricts,
divests or limits any rights or benefits accruing to the Partnership or
which increases the Partnership's obligations or costs of operation under
this Agreement or under the law of Poland, the Partnership may, at any time
thereafter so notify the Minister in writing. Promptly upon receipt of such
notice, the Minister and the Partnership shall meet to negotiate in good
faith and agree upon the modifications which need to be made to the terms
of this Agreement to restore the Partnership's rights and benefits to a
level equal to what they would have been had such change not occurred, or
upon such other remedy as they agree may be appropriate. In the event the
Parties are unable to agree within ninety (90) days after the Partnership's
notice to the Minister upon the modifications which are needed to the
Agreement or upon such other remedy as may be required, then either Party
may at any time thereafter refer the matter or matters in dispute to
arbitration pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as
follows:
16. 1.1 As mining usufruct fee with respect to the Prospecting and
Exploration for the eight Blocks, the Partnership shall pay the Polish
zloty equivalent of the following amounts:
a. US$25,000 within 60 days from obtaining the last Joint
Concessions;
b. US$50,000 within one year from obtaining the last Joint
Concessions; and
c. US$50,000 within two years from obtaining the last Joint
Concessions
16.1.2 Moreover, the Partnership will be obligated to pay the Treasury a
mining usufruct fee with respect to Exploitation in Zlotys based on
the market value of the reserves in place. The fee will be negotiated
by the Treasury and the Partnership within the range of 0.01 to 0.5
per mil of market value of the reserves in place as determined in
accordance with standard international petroleum industry engineering
criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted using
conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining Area at
the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments, commencing on
the date such Mining Area is designated and the applicable
Exploitation Concession is issued.
16.1.3 The mining usufruct fee shall be paid to the following bank
account:
Ministry of Environmental Protection, Natural Resources and Forestry
Biuro Administracyjno-Budzetowe
NBP 0/0 Warszawa
account # 10101010-680-223-1
title: 28.31.3996 S 64 - mining usufruct fee;
or such other account as the Minister may notify to the Partnership in
writing.
16.2 The concession fee referred to in Article 85 of the Geological and
Mining Law of February 4, 1994 shall amount to the zloty equivalent of US
$12.500 per each Exploration Concession covering one Block, payable in full
within sixty (60) days from obtaining the Exploration Concession. Sixty
percent (60%) of the fee shall constitute the revenue of the local
authorities on whose territory the activities under the Concession are to
be conducted and the remaining forty percent (40%) shall constitute the
revenue of the National Fund for Environmental Protection and Water
Management.
16.3 The Partnership envisages that it will spend the equivalent of US
$5,000,000 during the First 3-Year Exploration Period and US$ 10,000,000
during the Second 3-Year Exploration Period, subject to positive results of
the first phase of exploration.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury
shall remain responsible to the Partnership for all of its obligations to
the Partnership as provided herein.
17.3 The Minister shall notify the Partnership in writing of its naming of
the Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wr6blewski, Vice-Director
or the Minister: Department of Geology and
Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street, 00-922 Warsaw
Facsimile: 25-15-03
for the
Partnership: David N. Pierce
FX Energy Poland Sp. Zo.o. and Partners,
Commercial Partnership
Wal Miedzeszynski 646,
03-994 Warszawa Poland
Facsimile: 671-66-4O, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the
Polish language, shall be effective when delivered, if delivered during
business hours of working days; if received outside business hours such
notices shall be effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state
authorities. Such plenipotentiary shall be authorized to act on behalf of
the Partnership in any matters regarding this Agreement. The first such
plenipotentiary shall be Mr. David N. Pierce. Any removal of
plenipotentiary and appointment of a new one shall require a written notice
to the Minister.
18.4 This Agreement superseded the Mining Usufruct Agreement entered into by the
Parties hereto as of October 14, 1997.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 30th day of October, 1997.
The Minister of Environmental Protection,
Natural Resources and Forestry
of The Republic of Poland .
/s/ Dr. Krzysztof Szamalek, Secretary of State
FX Energy Poland Sp. z o.o. and Partners, Commercial Partnership
/s/ David N. Pierce
SCHEDULE "A"
MAP AND COORDINATES OF THE MINING USUFRUCT AREA
In the event of conflict between the coordinates specified below and the map
attached hereto, the coordinates shall control.
The Mining Usufruct Area shall include the following Blocks:
BLOCK N E BLOCK N E
Block 85 54. 00' 0" 16. 00' 0" Block 105 53. 45' 0" 16. 00' 0"
54. 00' 0" 16. 30' 0" 53. 45' 0" 16. 30' 0"
53. 45' 0" 16. 30' 0" 53. 30' 0" 16. 30' 0"
53. 45' 0" 16. 00' 0" 53. 30' 0" 16. 00' 0"
Block 86 54. 00' 0" 16. 30' 0" Block 108 53. 45' 0" 17. 30' 0"
54. 00' 0" 17. 00' 0" 53. 45' 0" 18. 00' 0"
53. 45' 0" 17. 00' 0" 53. 30' 0" 18. 00' 0"
53. 45' 0" 16. 30' 0" 53. 30' 0" 17. 30' 0"
Block 87 54. 00' 0" 17. 00' 0" 109 53. 45' 0" 18. 00' 0"
54. 00' 0" 17. 30' 0" 53. 45' 0" 18. 30' 0"
53. 45' 0" 17. 30' 0" 53. 30' 0" 18. 30' 0"
53. 45' 0" 17. 00' 0" 53. 30' 0" 18. 00' 0"
Block 88 54. 00' 0" 17. 30' 0" 129 53. 30' 0" 18. 00' 0"
54. 00' 0" 18. 00' 0" 53. 30' 0" 18. 30' 0"
53. 45' 0" 18. 30' 0" 53. 15' 0" 18. 30' 0"
53. 45' 0" 18. 30' 0" 53. 15' 0" 18. 00' 0"
Block 89 54. 00' 0" 18. 00' 0" 149 53. 15' 0" 18. 00' 0"
54. 00' 0" 18. 30' 0" 53. 15' 0" 18. 30' 0"
53. 45' 0" 18. 30' 0" 53. 00' 0" 18. 30' 0"
53. 45' 0" 18. 00' 0" 53. 30' 0" 18. 00' 0"
excluding the following existing concession area of Ciechnowo - Polczn Zdroj
which is described in Schedules B hereto. However, the areas so excluded may be
subject to concessions issued to the Partnership in the future, provided that
the third party rights thereto shall have by then expired or shall have been
acquired by the Partnership; in this case such area shall be part of the Mining
Usufruct Area.
[Attached is outline map of northern section of Poland in which concessions are
located containing grid of concession boundaries and numbers]
[Attached is a description of transaction as entered into the
Commercial Register kept by the District Court in Warsaw RHA-317]
MINING USUFRUCT AGREEMENT
With Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
Between
THE STATE TREASURY
OF THE REPUBLIC OF POLAND
And
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (EAST),
commercial partnership
This Agreement is entered into this 14th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister')
and
APACHE POLAND Sp. Zo.o. and FX ENERGY POLAND Sp. Zo.o. (EAST), COMMERCIAL
PARTNERSHIP, a Polish commercial partnership, with its seat at Wal Miedzeszyuski
646, 03994 Warszawa, Poland, entered into the Commercial Register kept by the
District Court in Warsaw, under number 317 (herein the "Partnership"),
represented by Mr. David N. Pierce.
WHEREAS, the Partnership desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Partnership, through its partners and their parent company, has the
experience, financial and technical ability and resources, and professional
expertise efficiently to explore for, develop and exploit Natural Gas and Oil in
the Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means any of the areas specified in Schedule "A". At the
effective date of this Agreement there are eleven (11) Blocks,
identified in Schedule "A" hereto as Blocks 319, 320, 339, 340, 340A,
359, 360, 360A, 379, 380, and 380A. Since only small parts of Blocks
340A, 360A, and 380A are situated within the territory of the Republic
of Poland, for all purposes of this Agreement, they will be treated
jointly with Blocks 340, 360, and 380, respectively.
1.2.2 "Concession" means an Exploration Concession or an Exploitation
Concession.
1.2.3 "Exploration Concession" means the Concession granted under the
Geological and Mining Law for the Prospecting for and Exploration of
Natural Gas and Oil of the type referred to in Article 15.2 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Natural Gas and Oil
of the type referred to in Article 15.2 of the Geological and Mining
Law.
1.2.5 "Concession Effective Date" as to any particular Concession means
the date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations covered
by the applicable Concession.
1.2.7 "Exploitation Period" means the thirty (30) years beginning on the
Concession Effective Date of the last Exploitation Concession for
which the Partnership has duly applied prior to the end of the
Exploration Period, and with respect to any individual Mining Area
from which Natural Gas or Oil in paying quantities is then being
recovered, such Exploitation Period can be extended upon the
Partnership's request so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.8 "Exploration Period" means the First 3-Year Exploration Period and
the Second 3-Year Exploration Period.
1.2.9 "First 3-Year Exploration Period" means the three (3) years
beginning on the Concession Effective Date of the last Exploration
Concession issued to the Company for all eight (8) Blocks specified in
Schedule "A"
1.2.10 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year
Exploration Period.
1.2.11 "Mining Usufruct Area " means the Block or Blocks described in
Schedule "A" excluding any portion thereof which is subject to third
party mining usufruct regarding Oil and Gas, as more specifically
described in Schedule B, and excluding any portion thereof in respect
of which the Partnership's rights hereunder are from time to time
relinquished or surrendered by the Partnership.
1.2.12 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or
extraction.
1 2.13 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.14 "Natural Gas" or "Gas" means hydrocarbons that are in a gaseous
state under normal atmospheric conditions of temperature and pressure,
including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the
condensation or extraction of liquid hydrocarbons from gas, but
excluding condensed or extracted liquid hydrocarbons.
1.2.15 "Parties" means the Treasury and the Partnership, and "Party "
means either of the Parties.
1.2.16 "Geological and Mining Law" means the Act of February 4th, 1994.
ARTICLE II
ESTABLISMENT OF MINING USUFRUCT
2.l The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for,
Exploration and Exploitation of Natural Gas and Oil. Such right is of an
exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to each Block is subject to the Partnership obtaining an
Exploration Concession covering such Block. The mining usufruct regarding
the Exploitation with respect to any area is subject to the Partnership
obtaining an Exploitation Concession covering such area. The Minister
agrees to use its best efforts leading to the issuance of eight Exploration
Concessions covering all the eight (8) Blocks and leading to the issuance
of Exploitation Concessions which may be requested by the Partnership from
time to time, and to the designation and approval of Mining Area
boundaries.
ARTICLE III
GRANT OP RIGHTS AND EFFECTIVENESS
This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Partnership if any of
the eight Exploration Concessions referred to in Article 2.2 is not granted
within four (4) months after the Partnership submits the concession application.
3.2 The Partnership shall submit application for Exploration Concessions within
ninety (90) days from the date hereof.
3.3 This Agreement shall terminate if no Exploration Concession is granted, or
upon the expiry or withdrawal of the last Concession granted to the
Partnership within the Mining Usufruct Area, or as otherwise provided by
law and in Article 3.5 below.
3.4 Subject to this Article, the duration of this Agreement shall be for so
long as any Concession granted to the Partnership within the Mining
Usufruct Area remains in effect.
3.5 In order to ensure that certain rights of Polish Oil and Gas Company S.A.
in Warsaw (POGC) are protected, the following provisions shall apply:
3.5.1 Within twelve ( 12) months from the date hereof the Partnership
shall submit to the Minister
a. an agreement between the Partnership or its partners or their
controlling entities and POGC which shall specify the terms of
accession by POGC to the activities performed hereunder, together
with a statement by POGC confirming that in connection with
entering into such agreement POGC agrees to the Prospecting,
Exploration and Exploitation of Oil and Gas within the Mining
Usufruct Area by the Partnership; or
b. a written statement by POGC including its consent to the conduct
by the Partnership of the aforesaid activity without
participation of POGC.
3.5.2 Failing the documents specified in Article 3.5.1, the Treasury
may terminate this Agreement, with respect to the whole or a part of
the Mining Usufruct Area by 30 day written notice. In such a case:
a. the Minister shall withdraw all or some of the Concessions, as
appropriate; and
b. the Partnership's obligations hereunder regarding the conduct of
work or payments which have not been fulfilled prior to the
serving of the termination notice shall cease.
ARTICLE IV
WORK PROGRAM
4.1 The Partnership will commence its work program not later than thirty (30)
days after the beginning of the Exploration Period.
4.2 Geological and Geophysical Evaluation
The Partnership will carry out and complete a regional evaluation during
the First 3-Year Exploration Period which shall cover one or more Blocks.
This evaluation will include the following:
a. Analysis, interpretation and reprocessing of existing seismic
data
b. Analysis of existing well log data
c. Integration and evaluation of seismic, log, gravity and magnetic
data
d. Identification of structural and stratigraphic traps
e. Identification and analysis of potential reservoir rock
characteristics
f. Determination of appropriate drilling, completion and production
techniques
g. Acquisition of 2-D seismic data over 500 km of seismic lines.
4.3 During the First 3-Year Exploration Period the Partnership shall drill two
(2) exploratory wells to a depth of approximately 2,000 to 3,000 meters, as
necessary to test a Carboniferous/Devonian objective. The first two wells
may be located anyplace within the Mining Usufruct Area at the discretion
of the Partnership.
4.4 Unless the Partnership has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period,
then during the Second 3-year Exploration Period the Partnership will drill
at least one well in each of the Blocks, excluding the Blocks which have
been relinquished on or before the end of the First 3-Year Exploration
Period and the Blocks in which a well was drilled during the First 3-Year
Exploration Period. Each of such wells shall be drilled to the depth
necessary to test a Carboniferous/Devonian objective, which is estimated to
be 2,000 to 3,000 meters.
4.5 Conducting seismic acquisition or drilling on territories adjacent to
existing mining establishments shall require coordination with the
operation program of such establishments.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Partnership may discover Natural Gas
and Oil deposits which it believes can be extracted profitably, in which
such case the Partnership shall prepare appropriate documents and request:
5.1.1 approval of the Geological Documentation by the appropriate
agency of the state geological administration; and
5.1.2 an Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Natural Gas and Oil demonstrated by available seismic, gravity and well
data.
5.3 The Partnership shall have the right to extract and exploit Natural Gas and
Oil upon approval of Geological Documentation and issuance of the relevant
Exploitation Concession.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Partnership from the
Mining Usufruct Area shall pass to the Partnership at the wellhead.
6.3 Area the Concession Effective Date of an Exploration Concession, the
Partnership will have access to and the right to copy, free of cost other
than reasonable costs of reproduction and handling, all geological,
geophysical, geochemical, drilling, engineering, well log, and other
information and data relating to Natural Gas and Oil owned or possessed by
the Treasury or the Minister in relation to the Block covered by such
Exploration Concession.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Exploration Period the Partnership shall
relinquish all of the lands within the Mining Usufruct Area which are
not within the boundaries of any Mining Areas that have been
designated for Exploitation in connection with the issuance of an
Exploitation Concession or duly applied by the Partnership for such
designation.
7.1.2 The Partnership may relinquish all or part of the Mining Usufruct
Area at the end of the First 3-Year Exploration Period or at any time
during the Second 3-Year Exploration Period subject to fulfillment of
any accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the end of the
relevant period, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment in accordance with the aforementioned criteria relating to
size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the Concessions and is to provide all
capital, machinery, equipment, technology and personnel necessary for the
conduct of Concession Operations.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum
industry practices as designed to permit the economic, efficient and safe
exploration for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for
and insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the
Partnership such general information as may be reasonably required by
the Partnership for planning and executing projects incidental to
Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan. The Partnership shall
also notify the Minister in advance (two months in advance, if possible) of
abandonment of any wells that have been in production. In the event such
advance notice is not practical, or in the event of emergency, the
Partnership shall notify the Minister within forty-eight (48) hours
following such event.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and
the maps, sections and other documents related thereto;
8.5.2 one set of ail geophysical recordings, measurements and reports,
with all maps profiles, sections, interpretations, studies, and other
documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs representing the
lithology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples, fluids and other
materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in final
form produced by or for the Partnership in connection with Concession
Operations.
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail, and at such time as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder,
provided, however, that the Minister's requests for such reports shall not
interfere unreasonably with the Partnership's ability to carry out
Concession Operations efficiently or necessitate any undue expense.
Pursuant to the above mentioned determination, the Partnership shall submit
annually to the Minister a report of the progress of the work and a short
memorandum of the results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the Partnership's capital structure, petition for
bankruptcy, restructuring of debt, or liquidation. The Minister may request
any necessary clarification in these matters.
ARTICLE IX
PROTECTION OF THE ENVIRONMENT--SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating
to the protection of the environment, including but not necessarily limited
to the following:
9.1.1 The Partnership shall in particular take all commercially
reasonable steps required by Polish law and good international
petroleum industry practice to:
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste of
Natural Gas and Oil or ground water discovered in or produced
from the Mining Usufruct Area
c. prevent damage to Natural Gas and Oil or ground water bearing
strata; and
d. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9.1.2 If there is a release of Natural Gas or Oil or other material on
land, fresh water, or any other form of pollution or other harm to
fresh water, land, animal life or flora as a result of Concession
Operations, the Partnership shall promptly take all necessary measures
to control the pollution, to clean up any Natural Gas and Oil or
released material, or to repair, to the extent commercially feasible,
any damage resulting from such circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the
Minister immediately and shall take such action as may be prescribed
by the appropriate governmental authority and otherwise act in
accordance with good international petroleum industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINTNG
10.1 Subject to the applicable provisions of law, the Partnership shall be
free to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate
for Polish citizens. employed directly or indirectly in the Concession
Operations during term of this Agreement.
10.3 Notwithstanding the above, the Partnership will spend US $25,000 per
year during the Exploration Period on training of Polish citizens, as
directed by the Minister. The amounts and kinds of such expenditures
thereafter shall be determined from time to time by further agreement
between the Partnership and the Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer ail or part of its
rights and obligations under this Agreement to any affiliate or third
party, subject to the requirement that the Partnership obtain the prior
written consent of the Treasury, which consent shall not be unreasonably
withheld or delayed provided that the Minister shall be satisfied that any
such assignee shall be technically and financially able to carry out the
terms and conditions of this Agreement.
11.2 A change of the legal persons who from the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury
shall be excused in the event such performance is delayed or prevented by
acts of Force Majeure. Acts of Force Majeure are events beyond the
reasonable control of the Party claiming to be affected by any such event,
which have not been brought about at its insistence and include, but are
not limited to, war, insurrection, riot, civil disorder, embargo, blockade,
explosion, fire, lightening, earthquake or other adverse weather
conditions, strikes, non-availability of equipment or any other event of a
similar nature, whether or not of the same type or kind. The foregoing is
based on the proviso, however, that the Partnership or the Treasury, as the
case may be, shall be required to use reasonable diligence to seek to
overcome the obstacle and resume performance within a reasonable time after
the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected
shall notify forthwith the other Party thereof in writing stating the
cause, and the Parties shall do all that is reasonably within their power
to remove such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on sixty (60)
days' notice to the Minister.
13.2 In the event the Partnership takes an action or fails to take an
action which results in a material breach of this Agreement, then within
ninety (90) days of receiving written notice from the Minister of such
alleged material breach the Partnership shall take action reasonably
intended to remedy such alleged breach. If within the time allowed the
Partnership fails to take remedial action, then this Agreement may be
terminated by the Minister on behalf of the Treasury on sixty (60) days'
written notice.
13.3 Should the Partnership dispute the existence of circumstances in
Article 13.2, the Partnership may refer the dispute at any time before the
end of ninety (90) days after receipt of the notice of termination from the
Minister to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall not take effect
except under the terms of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without prejudice
to any right which may have accrued to the Treasury or the Partnership
under the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in
connection with this Agreement, including, without limitation, any dispute
as to the validity, construction, enforceability or breach of this
Agreement shall be exclusively and finally settled by arbitration, and any
Party may submit such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third
arbitrator appointed pursuant to Article 14.2 shall not be a national of
Poland or of the same nationality as the main shareholder(s) of
Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties' be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all
purposes; and
14.4.3 the decision of the majority of the arbitrators shall be final
and binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their performance
of this Agreement unless it is impossible to do so for reason of Force
Majeure or unless the Partnership's rights hereunder have been
expropriated, nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined by
the arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
immunity from service of process, immunity from jurisdiction of any court,
and immunity of such of its property as is of a commercial nature from
execution.
ARTICLE XV
GOVERNING LAW AND STABLIZATION
15.1 This Agreement shall be governed by the laws of Poland and
international treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the
Partnership has entered into this Agreement in reliance on the Polish law
as in existence on the date the Partnership executes this Agreement,
particularly the laws and ordinances relating to royalties, taxation, the
export of Oil, the sale of Natural Gas, and the repatriation of profits.
The Minister on behalf of the Treasury hereby represents that all rights
granted to the Partnership hereunder are in conformity with Polish law as
in effect on the date the Partnership executes this Agreement, as such law
applies to the Partnership. In the event that any change to the law of
Poland occurs or the Government takes any other action which restricts,
divests or limits any rights or benefits accruing to the Partnership or
which increases the Partnership's obligations or costs of operation under
this Agreement or under the law of Poland, the Partnership may, at any time
thereafter so notify the Minister in writing. Promptly upon receipt of such
notice, the Minister and the Partnership shall meet to negotiate in good
faith and agree upon the modifications which need to be made to the terms
of this Agreement to restore the Partnership's rights and benefits to a
level equal to what they would have been had such change not occurred, or
upon such other remedy as they agree may be appropriate. In the event the
Parties are unable to agree within ninety (90) days after the Partnership's
notice to the Minister upon the modifications which are needed to the
Agreement or upon such other remedy as may be required, then either Party
may at any time thereafter refer the matter or matters in dispute to
arbitration pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as
follows:
16.1.1 As mining usufruct fee with respect to the Prospecting and
Exploration for the eight Blocks, the Partnership shall pay the Polish
zloty equivalent of the following amounts:
a. US$ 20,000 within 60 days from obtaining the eight Exploration
Concessions;
b. US$ 40,000 within one year from obtaining the eight Exploration
Concessions; and
c. US$ 40,000 within two years from obtaining the eight Exploration
Concessions
16.1.2 Moreover, the Partnership will be obligated to pay the Treasury a
mining usufruct fee with respect to Exploitation in Zlotys based on
the market value of the reserves in place. The fee will be negotiated
by the Treasury and the Partnership within the range of 0.01 to 0.5
per mil of market value of the reserves in place as determined in
accordance with standard international petroleum industry engineering
criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted using
conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining Area at
the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments, commencing on
the date such Mining Area is designated and the applicable
Exploitation Concession is issued.
16.1.3 The mining usufruct fee shall be paid to the following bank
account:
Ministry of Environmental Protection, Natural Resources and Forestry
Biuro Administracyjno-Budzetowe
NBP 0/0 Warszawa
account # 10101010-680-223-1
title: 28.31.3996 S 64 - mining usufruct fee;
or such other account as the Minister may notify to the Partnership in
writing.
16.2 The concession fee referred to in Article 85 of the Geological and
Mining Law of February 4, 1994 shall amount to the zloty equivalent of US
$12.500 per each Exploration Concession covering one Block, payable in full
within sixty (60) days from obtaining the Exploration Concession. Sixty
percent (60%) of the fee shall constitute the revenue of the local
authorities on whose territory the activities under the Concession are to
be conducted and the remaining forty percent (40%) shall constitute the
revenue of the National Fund for Environmental Protection and Water
Management.
16.3 The Partnership envisages that it will spend the equivalent of US
$5,000,000 during the First 3-Year Exploration Period and US$ 10,000,000
during the Second 3-Year Exploration Period, subject to positive results of
the first phase of exploration.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury
shall remain responsible to the Partnership for all of its obligations to
the Partnership as provided herein.
17.3 The Minister shall notify the Partnership in writing of its naming of
the Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wroblewski, Vice-Director
or the Minister: Department of Geology and
Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street, 00-922 Warsaw
Facsimile: 25-15-03
for the
Partnership: David N. Pierce
Apache Poland Sp. z o.o. and FX Energy Poland
Sp. Zo.o. (East), Commercial Partnership
Wal Miedzeszynski 646,
03-994 Warszawa Poland
Facsimile: 671-66-4O, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the Polish
language, shall be effective when delivered, if delivered during business hours
of working days; if received outside business hours such notices shall be
effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state authorities.
Such plenipotentiary shall be authorized to act on behalf of the Partnership in
any matters regarding this Agreement. The first such plenipotentiary shall be
Mr. David N. Pierce. Any removal of plenipotentiary and appointment of a new one
shall require a written notice to the Minister.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 14th day of October, 1997.
The Minister of Environmental Protection,
Natural Resources and Forestry
of The Republic of Poland.
/s/ Krzysztof Szamalek, Secretary of State
Apache Poland Sp. z o.o. and FX Energy Poland Sp. z o.o (East), Commercial
Partnership
/s/ David N. Pierce
SCHEDULE "A"
MAP AND COORDINATES OF THE MINING USUFRUCT AREA
In the event of conflict between the coordinates specified below and the map
attached hereto, the coordinates shall control.
The Mining Usufruct Area shall include the following Blocks:
Block 319 E 23. 00' 00" N 51. 00' 00"
E 23. 30' 00" N 51. 15' 00"
E 23. 00' 00" N 51. 00' 00"
E 23. 30' 00" N 51. 15' 00"
Block 320 E 23. 30' 00" N 51. 15' 00"
E 24. 00' 00" N 51. 15' 00"
E 23. 30' 00" N 51. 00' 00"
E 24. 00' 00" N 51. 00' 00"
Block 339 E 23. 00' 00" N 51. 00' 00"
E 23. 30' 00" N 51. 00' 00"
E 23. 00' 00" N 51. 45' 00"
E 23. 30' 00" N 51. 45' 00"
Block 340 E 23. 30' 00" N 51. 00' 00"
E 24. 00' 00" N 51. 00' 00"
E 23. 30' 00" N 51. 45' 00"
E 23. 30' 00" N 51. 45' 00"
Block 340A E 51. 00' 00" N 24. 00' 00"
E 51. 00' 00" N 24. 30' 00"
E 50. 45' 00" N 24. 30' 00"
E 50. 45' 00" N 24. 00' 00"
Block 359 E 23. 00' 00" N 50. 45' 00"
E 23. 30' 00" N 50. 30' 00"
E 23. 00' 00" N 50. 30' 00"
E 23. 30' 00" N 50. 30' 00"
Block 360 E 23. 30' 00" N 50. 45' 00"
E 24. 00' 00" N 50. 45' 00"
E 23. 30' 00" N 50. 30' 00"
E 24. 00' 00" N 50. 30' 00"
Block 360A E 50. 45' 00" N 24. 00' 00"
E 50. 45' 00" N 24. 30' 00"
E 50. 30' 00" N 24. 30' 00"
E 50. 30' 00" N 24. 00' 00"
Block 379 E 23. 00' 00" N 50. 30' 00"
E 23. 30' 00" N 50. 15' 00"
E 23. 00' 00" N 50. 15' 00"
E 23. 30' 00" N 50. 30' 00"
Block 380 E 23. 30' 00" N 50. 30' 00"
E 24. 00' 00" N 50. 30' 00"
E 23. 30' 00" N 50. 15' 00"
E 24. 00' 00" N 50. 15' 00"
Block 380A E 50. 30' 00" N 24. 00' 00"
E 50. 30' 00" N 24. 30' 00"
E 50. 15' 00" N 24. 30' 00"
E 50. 30' 00" N 24. 00' 00"
Excluding the following existing concession ares: Wola Obszanska - Cewkow and
the area of Grabosiec-Rachanie, as more specifically described in Schedules B,
and C. However, the areas so excluded may be subject to Exploitation
Concessions issued to the Partnership in the future, provided that the third
party rights thereto shall have by then expired or shall have been acquired by
the Partnership; in this case such areas shall be part of the Mining Usufruct
Area.
[Attached is outline map of section of Poland in which concessions are located
containing grid of concession boundaries and numbers]
Schedule B
Description of certain parcels excluded from concessions described
Schedule C
Description of certain parcels excluded from concessions described
MINING USUFRUCT AGREEMENT
with Respect to
Prospecting for and Exploration and Exploitation of
Natural Gas and Oil
between
THE STATE TREASURY
OF THE REPUBLIC OF POLAND
and
FX ENERGY POLAND Sp. z o.o. and GASEX
PRODUCTION COMPANY Sp. z o.o., commercial
partnership
This Agreement is entered into this 14th day of October, 1997 by and between the
STATE TREASURY OF THE REPUBLIC OF POLAND (herein the "Treasury"), represented by
the Minister of Environmental Protection, Natural Resources and Forestry Mr.
Stanislaw Zelichowski (herein the "Minister"), acting through Dr. Krzysztof
Szmalek, Secretary of State
and
FX ENERGY POLAND SP. Z O.O. AND GASEX PRODUCTION COMPANY Sp. z o.o., COMMERCIAL
PARTNERSHIP, a Polish commercial partnership, with its seat at Wal Miedzeszynski
646, 03-994 Warszawa, Poland, entered into the Commercial Register kept by the
District Court in Warsaw, under number RHA 314 (herein the "Partnership"),
represented by Mr. David N. Pierce.
WHEREAS, the Partnership desires to explore for and exploit Natural Gas and Oil
in the Republic of Poland; and
WHEREAS, the Partnership, through its partners and their parent company, has the
experience, financial and technical ability and resources, and professional
expertise efficiently to explore for, develop and exploit Natural Gas and Oil in
the Republic of Poland; and
WHEREAS, the ownership of all Natural Gas and Oil existing in its natural
condition within the territory of the Republic of Poland belongs to the
Treasury;
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms when used in this Agreement shall have the meaning
ascribed to them in the Geological and Mining Law as in effect on the date
of this Agreement:
Prospecting
Exploration
Exploitation
Geological Documentation
Mineral Deposit
Mining Area
Geological Works
Geological Works Plan
1.2 The following terms when used in this Agreement shall have the meaning
ascribed to them hereunder:
1.2.1 "Block" means any of the areas specified in Schedule "A". At the
effective date of this Agreement there are 12 (twelve) Blocks,
identified in Schedule "A" hereto as Blocks 410, 411, 412, 413, 414,
415, 430, 431, 432, 433, 452 and 453.
1.2.2 "Concession" means an Exploration Concession or an Exploitation
Concession.
1.2.3 "Exploration Concession" means the Concession granted under the
Geological and Mining Law for the Prospecting for and Exploration of
Natural Gas and Oil of the type referred to in Article 15.2 of the
Geological and Mining Law.
1.2.4 "Exploitation Concession" means the Concession granted under the
Geological and Mining Law for the Exploitation of Natural Gas and Oil
of the type referred to in Article 15.2 of the Geological and Mining
Law.
1.2.5 "Concession Effective Date" as to any particular Concession means
the date on which the Minister signs the Concession.
1.2.6 "Concession Operations" means all or any of the operations covered
by the applicable Concession.
1.2.7 "Exploitation Period" means the thirty (30) years beginning on the
Concession Effective Date of the last Exploitation Concession for
which the Partnership has duly applied prior to the end of the
Exploration Period, and with respect to any individual Mining Area
from which Natural Gas or Oil in paying quantities is then being
recovered, such Exploitation Period can be extended upon the
Partnership's request so long as Natural Gas or Oil is being produced
therefrom in paying quantities.
1.2.8 "Exploration Period" means the First 3-Year Exploration Period and
the Second 3-Year Exploration Period.
1.2.9 "First 3-Year Exploration Period" means the three (3) years
beginning on the Concession Effective Date of the last Exploration
Concession issued to the Company for all eight (8) Blocks specified in
Schedule "A"
1.2.10 "Second 3-Year Exploration Period" means the three (3) years
beginning on the first day after the end of the First 3-Year
Exploration Period.
1.2.11 "Mining Usufruct Area " means the Block or Blocks described in
Schedule "A" excluding any portion thereof which is subject to third
party mining usufruct regarding Oil and Gas, as more specifically
described in Schedule B, and excluding any portion thereof in respect
of which the Partnership's rights hereunder are from time to time
relinquished or surrendered by the Partnership.
1.2.12 "Oil" means mineral oil, asphalt, ozokerite and all kinds of
hydrocarbons and bitumens, both in solid and in liquid form, in their
natural state or obtained from Natural Gas by condensation or
extraction.
1 2.13 "Designated Entity" means an entity designated by the Minister to
represent it for certain purposes under this Agreement as set forth in
Article XVII.
1.2.14 "Natural Gas" or "Gas" means hydrocarbons that are in a gaseous
state under normal atmospheric conditions of temperature and pressure,
including wet gas, dry gas, casinghead gas and all other gaseous
hydrocarbons including the residue gas remaining after the
condensation or extraction of liquid hydrocarbons from gas, but
excluding condensed or extracted liquid hydrocarbons.
1.2.15 "Parties" means the Treasury and the Partnership, and "Party "
means either of the Parties.
1.2.16 "Geological and Mining Law" means the Act of February 4th, 1994.
ARTICLE II
ESTABLISMENT OF MINING USUFRUCT
2. l The Minister acting on behalf of the Treasury, as the sole owner of the
Mineral Deposits, hereby establishes in favor of the Partnership a mining
usufruct in the Mining Usufruct Area regarding the Prospecting for,
Exploration and Exploitation of Natural Gas and Oil. Such right is of an
exclusive nature.
2.2 The mining usufruct regarding the Prospecting for and Exploration with
respect to each Block is subject to the Partnership obtaining an
Exploration Concession covering such Block. The mining usufruct regarding
the Exploitation with respect to any area is subject to the Partnership
obtaining an Exploitation Concession covering such area. The Minister
agrees to use its best efforts leading to the issuance of eight Exploration
Concessions covering all the eight (8) Blocks and leading to the issuance
of Exploitation Concessions which may be requested by the Partnership from
time to time, and to the designation and approval of Mining Area
boundaries.
ARTICLE III
GRANT OP RIGHTS AND EFFECTIVENESS
This Agreement is effective when executed by both Parties, but may be
terminated after sixty (60) days' written notice by the Partnership if any of
the eight Exploration Concessions referred to in Article 2.2 is not granted
within four (4) months after the Partnership submits the concession application.
3.2 The Partnership shall submit application for Exploration Concessions within
ninety (90) days from the date hereof.
3.3 This Agreement shall terminate if no Exploration Concession is granted, or
upon the expiry or withdrawal of the last Concession granted to the
Partnership within the Mining Usufruct Area, or as otherwise provided by
law and in Article 3.5 below.
3.4 Subject to this Article, the duration of this Agreement shall be for so
long as any Concession granted to the Partnership within the Mining
Usufruct Area remains in effect.
3.5 In order to ensure that certain rights of Polish Oil and Gas Company S.A.
in Warsaw (POGC) are protected, the following provisions shall apply:
3.5.1 Within twelve ( 12) months from the date hereof the Partnership
shall submit to the Minister
a. an agreement between the Partnership or its partners or their
controlling entities and POGC which shall specify the terms of
accession by POGC to the activities performed hereunder, together
with a statement by POGC confirming that in connection with
entering into such agreement POGC agrees to the Prospecting,
Exploration and Exploitation of Oil and Gas within the Mining
Usufruct Area by the Partnership; or
b. a written statement by POGC including its consent to the conduct
by the Partnership of the aforesaid activity without
participation of POGC.
3.5.2 Failing the documents specified in Article 3.5.1, the Treasury
may terminate this Agreement, with respect to the whole or a part of
the Mining Usufruct Area by 30 day written notice. In such a case:
a. the Minister shall withdraw all or some of the Concessions, as
appropriate; and
b. the Partnership's obligations hereunder regarding the conduct of
work or payments which have not been fulfilled prior to the
serving of the termination notice shall cease.
ARTICLE IV
WORK PROGRAM
4.1 The Partnership will commence its work program not later than thirty (30)
days after the beginning of the Exploration Period.
4.2 Geological and Geophysical Evaluation
The Partnership will carry out and complete a regional evaluation during
the First 3-Year Exploration Period which shall cover one or more Blocks.
This evaluation will include the following:
a. Analysis, interpretation and reprocessing of existing seismic
data
b. Analysis of existing well log data
c. Integration and evaluation of seismic, log, gravity and magnetic
data
d. Identification of structural and stratigraphic traps
e. Identification and analysis of potential reservoir rock
characteristics
f. Determination of appropriate drilling, completion and production
techniques
g. Acquisition of 2-D seismic data over 500 km of seismic lines.
4.3 During the First 3-Year Exploration Period the Partnership shall drill two
(2) exploratory wells to a depth of approximately 2,000 to 3,000 meters, as
necessary to test a Carboniferous/Devonian objective. The first two wells
may be located anyplace within the Mining Usufruct Area at the discretion
of the Partnership.
4.4 Unless the Partnership has relinquished all of its interest in the Mining
Usufruct Area on or before the end of the First 3-Year Exploration Period,
then during the Second 3-year Exploration Period the Partnership will drill
at least one well in each of the Blocks, excluding the Blocks which have
been relinquished on or before the end of the First 3-Year Exploration
Period and the Blocks in which a well was drilled during the First 3-Year
Exploration Period. Each of such wells shall be drilled to the depth
necessary to test a Carboniferous/Devonian objective, which is estimated to
be 2,000 to 3,000 meters.
4.5 Conducing seismic acquisition or drilling on territories adjacent to
existing mining establishments shall require coordination with the
operation program of such establishments.
ARTICLE V
DESIGNATION OF MINING AREAS
5.1 During the term of this Agreement, the Partnership may discover Natural Gas
and Oil deposits which it believes can be extracted profitably, in which
such case the Partnership shall prepare appropriate documents and request:
5.1.1 approval of the Geological Documentation by the appropriate
agency of the state geological administration; and
5.1.2 an Exploitation Concession.
5.2 The Mining Area shall be designated based on geological documentation and
it will include the entire surface area within the contour of the deposit
of Natural Gas and Oil demonstrated by available seismic, gravity and well
data.
5.3 The Partnership shall have the right to extract and exploit Natural Gas and
Oil upon approval of Geological Documentation and issuance of the relevant
Exploitation Concession.
ARTICLE VI
OWNERSHIP OF DATA AND NATURAL GAS AND OIL
6.1 Ownership of all information and data obtained as a result of Concession
Operations shall be vested in the Partnership. The Partnership shall,
however, provide the Minister with the information and reports described in
Article 8.5 and 8.6.
6.2 Ownership of all Natural Gas and Oil produced by the Partnership from the
Mining Usufruct Area shall pass to the Partnership at the wellhead.
6.3 Area the Concession Effective Date of an Exploration Concession, the
Partnership will have access to and the right to copy, free of cost other
than reasonable costs of reproduction and handling, all geological,
geophysical, geochemical, drilling, engineering, well log, and other
information and data relating to Natural Gas and Oil owned or possessed by
the Treasury or the Minister in relation to the Block covered by such
Exploration Concession.
ARTICLE VII
RELINQUISHMENT
7.1 The Partnership shall relinquish part or parts of the Mining Usufruct Area
as follows:
7.1.1 At the end of the Exploration Period the Partnership shall
relinquish all of the lands within the Mining Usufruct Area which are
not within the boundaries of any Mining Areas that have been
designated for Exploitation in connection with the issuance of an
Exploitation Concession or duly applied by the Partnership for such
designation.
7.1.2 The Partnership may relinquish all or part of the Mining Usufruct
Area at the end of the First 3-Year Exploration Period or at any time
during the Second 3-Year Exploration Period subject to fulfillment of
any accrued obligations.
7.2 The areas to be relinquished under this Article shall be determined by the
Partnership, provided that areas to be relinquished shall be of sufficient
size and convenient shape to enable activities to be carried out thereon by
others. The Partnership shall give notice in writing to the Minister of
said area(s) no later than thirty (30) days prior to the end of the
relevant period, including a map showing said area(s) with the geographic
location and the coordinates of the connecting points of the boundary
lines. The Minister shall advise the Partnership within fifteen (15) days
of such notice whether it agrees with the area(s) selected for
relinquishment in accordance with the aforementioned criteria relating to
size and shape.
ARTICLE VIII
CONDUCT OF OPERATIONS
8.1 The Partnership is responsible for the conduct of the Concession Operations
contemplated by this Agreement and the Concessions and is to provide all
capital, machinery, equipment, technology and personnel necessary for the
conduct of Concession Operations.
8.2 The Partnership shall conduct the Concession Operations diligently and in
accordance with the laws of Poland and good international petroleum
industry practices as designed to permit the economic, efficient and safe
exploration for, and development and production of, Natural Gas and Oil.
8.3 The Minister will endeavor to provide the Partnership with assistance as
described below when the Minister believes it is in the best interest of
the Partnership to do so, but failure to provide the described assistance
will not result in an extension of time in which the Partnership is to
perform the relevant obligations, nor create any liability or
responsibility on the part of the Treasury.
8.3.1 The Minister will assist the Partnership in its application for
and insofar as possible in granting by national and local Polish
government of permissions required for the performance of Concession
Operations, including, but not limited to, licenses, permits,
approvals, authorizations, consents, visas, work permits, surface
rights and easements.
8.3.2 The Minister will assist in obtaining and providing to the
Partnership such general information as may be reasonably required by
the Partnership for planning and executing projects incidental to
Concession Operations.
8.4 Prior to commencing any Geological Works, the Partnership shall submit to
the Minister the applicable Geological Works Plan. The Partnership shall
also notify the Minister in advance (two months in advance, if possible) of
abandonment of any wells that have been in production. In the event such
advance notice is not practical, or in the event of emergency, the
Partnership shall notify the Minister within forty-eight (48) hours
following such event.
8.5 The Partnership shall provide to the Minister or to the Designated Entity,
as defined in Article XVII, data and information collected and compiled
with respect to Concession Operations in the Mining Usufruct Area, as
follows:
8.5.1 one set of geological reports, studies, or interpretations and
the maps, sections and other documents related thereto;
8.5.2 one set of ail geophysical recordings, measurements and reports,
with all maps profiles, sections, interpretations, studies, and other
documents relating thereto, and copies of recordings (tapes or
otherwise and all supporting data);
8.5.3 one set of final well reports and composite logs representing the
lithology and other parameters relating to each well drilled;
8.5.4 a representative portion of all cores, samples, fluids and other
materials taken from outcrops and wells; and
8.5.5 one set of fluid measurements, analyses or other results in final
form produced by or for the Partnership in connection with Concession
Operations.
All of such information shall be kept confidential by the Minister or the
Designated Entity for a period of one year after it is provided.
8.6 The Partnership shall make such other reports to the Minister in such form,
detail, and at such time as the Minister may reasonably require with
respect to exploration, production, employment or training, or such other
matters related to the conduct of Concession Operations hereunder,
provided, however, that the Minister's requests for such reports shall not
interfere unreasonably with the Partnership's ability to carry out
Concession Operations efficiently or necessitate any undue expense.
Pursuant to the above mentioned determination, the Partnership shall submit
annually to the Minister a report of the progress of the work and a short
memorandum of the results thereof.
8.7 The Partnership shall give prompt written notice to the Minister in the
event of any change of the Partnership's name, organizational form,
increase or decrease of the Partnership's capital structure, petition for
bankruptcy, restructuring of debt, or liquidation. The Minister may request
any necessary clarification in these matters.
ARTICLE IX
PROTECTION OF THE ENVIRONMENT--SAFETY
9.1 The Partnership shall conduct Concession Operations in accordance with the
laws of Poland and good international petroleum industry practice relating
to the protection of the environment, including but not necessarily limited
to the following:
9.1.1 The Partnership shall in particular take all commercially
reasonable steps required by Polish law and good international
petroleum industry practice to:
a. ensure that its operations minimize ecological damage or
destruction;
b. control the flow and prevent the avoidable escape or waste of
Natural Gas and Oil or ground water discovered in or produced
from the Mining Usufruct Area
c. prevent damage to Natural Gas and Oil or ground water bearing
strata; and
d. prevent damage to land, fresh water supplies, animal life, flora,
crops, buildings or other structures.
9.1.2 If there is a release of Natural Gas or Oil or other material on
land, fresh water, or any other form of pollution or other harm to
fresh water, land, animal life or flora as a result of Concession
Operations, the Partnership shall promptly take all necessary measures
to control the pollution, to clean up any Natural Gas and Oil or
released material, or to repair, to the extent commercially feasible,
any damage resulting from such circumstances.
9.1.3 In the event of an emergency the Partnership shall notify the
Minister immediately and shall take such action as may be prescribed
by the appropriate governmental authority and otherwise act in
accordance with good international petroleum industry practice.
9.1.4 The Partnership shall take steps to ensure restoration of the
operating environment upon termination of the Concessions. The
Partnership shall provide the Minister a copy of the plans for
restoration of the operating environment that are required by law.
ARTICLE X
EMPLOYMENT AND TRAINTNG
10.1 Subject to the applicable provisions of law, the Partnership shall be
free to employ such personnel and sub-contractors as it may choose for the
purpose of carrying out the Concession Operations. To the extent the
Partnership deems it reasonable and prudent to do so, and as far as is
consistent with efficient operations and with the Partnership's
responsibility for the conduct of the Concession Operations, in recruiting
employee candidates the Partnership shall give preference to Polish
citizens who are qualified by education, training and experience to conduct
the tasks for which they are considered; and in selecting subcontractors to
carry out the Concession Operations in the Republic of Poland the
Partnership shall give preference to Polish sub-contractors, provided they
are competitive in terms of quality, cost, and the ability to meet required
schedules.
10.2 The Partnership shall provide such training as it deems appropriate
for Polish citizens. employed directly or indirectly in the Concession
Operations during term of this Agreement.
10.3 Notwithstanding the above, the Partnership will spend US $25,000 per
year during the Exploration Period on training of Polish citizens, as
directed by the Minister. The amounts and kinds of such expenditures
thereafter shall be determined from time to time by further agreement
between the Partnership and the Minister.
ARTICLE XI
ASSIGNMENT
11.1 The Partnership has the right to assign or transfer ail or part of its
rights and obligations under this Agreement to any affiliate or third
party, subject to the requirement that the Partnership obtain the prior
written consent of the Treasury, which consent shall not be unreasonably
withheld or delayed provided that the Minister shall be satisfied that any
such assignee shall be technically and financially able to carry out the
terms and conditions of this Agreement.
11.2 A change of the legal persons who from the Partnership or a change of
ownership of shares of any of such legal persons shall not be considered an
assignment or transfer of rights under this Agreement.
ARTICLE XII
FORCE MAJEURE
12.1 Performance under this Agreement by the Partnership or the Treasury
shall be excused in the event such performance is delayed or prevented by
acts of Force Majeure. Acts of Force Majeure are events beyond the
reasonable control of the Party claiming to be affected by any such event,
which have not been brought about at its insistence and include, but are
not limited to, war, insurrection, riot, civil disorder, embargo, blockade,
explosion, fire, lightening, earthquake or other adverse weather
conditions, strikes, non-availability of equipment or any other event of a
similar nature, whether or not of the same type or kind. The foregoing is
based on the proviso, however, that the Partnership or the Treasury, as the
case may be, shall be required to use reasonable diligence to seek to
overcome the obstacle and resume performance within a reasonable time after
the obstacle is removed.
12.2 If Concession Operations are delayed, curtailed or prevented by such
causes, then the time for carrying out the obligations affected thereby,
the duration of the relevant period of Concession Operations, the term of
this Agreement, and all rights and obligations hereunder, all shall be
extended for a period equal to the delay caused by the Force Majeure
occurrence plus such period of time as is necessary to reestablish
operations.
12.3 The Party whose ability to perform its obligations is so affected
shall notify forthwith the other Party thereof in writing stating the
cause, and the Parties shall do all that is reasonably within their power
to remove such cause.
ARTICLE XIII
TERMINATION
13.1 The Partnership may relinquish all or any part of its rights and be
relieved of the related obligations under this Agreement on sixty (60)
days' notice to the Minister.
13.2 In the event the Partnership takes an action or fails to take an
action which results in a material breach of this Agreement, then within
ninety (90) days of receiving written notice from the Minister of such
alleged material breach the Partnership shall take action reasonably
intended to remedy such alleged breach. If within the time allowed the
Partnership fails to take remedial action, then this Agreement may be
terminated by the Minister on behalf of the Treasury on sixty (60) days'
written notice.
13.3 Should the Partnership dispute the existence of circumstances in
Article 13.2, the Partnership may refer the dispute at any time before the
end of ninety (90) days after receipt of the notice of termination from the
Minister to arbitration as provided by Article XIV and termination of the
Agreement by the Minister on behalf of the Treasury shall not take effect
except under the terms of any arbitration award which results.
13.4 Termination under this Article XIII shall take place without prejudice
to any right which may have accrued to the Treasury or the Partnership
under the Agreement prior to such termination.
ARTICLE XIV
ARBITRATION
14.1 Any dispute as to any matter or operation arising out of or in
connection with this Agreement, including, without limitation, any dispute
as to the validity, construction, enforceability or breach of this
Agreement shall be exclusively and finally settled by arbitration, and any
Party may submit such a dispute to arbitration.
14.2 Arbitration proceedings shall be conducted by three (3) arbitrators in
accordance with the Rules of UNCITRAL, the United Nations Commission on
International Trade Law.
14.3 Unless otherwise agreed in writing by the Parties, the third
arbitrator appointed pursuant to Article 14.2 shall not be a national of
Poland or of the same nationality as the main shareholder(s) of
Partnership.
14.4 In any arbitration proceeding hereunder:
14.4.1 proceedings shall, unless otherwise agreed in writing by the
Parties' be held in Warsaw, Poland;
14.4.2 the Polish language shall be the official language for all
purposes; and
14.4.3 the decision of the majority of the arbitrators shall be final
and binding and shall be enforceable in any court of competent
jurisdiction.
14.5 In case of arbitration, the Parties shall continue their performance
of this Agreement unless it is impossible to do so for reason of Force
Majeure or unless the Partnership's rights hereunder have been
expropriated, nationalized or otherwise taken.
14.6 The costs of arbitration shall be borne in the manner determined by
the arbitration tribunal.
14.7 Each of the Parties hereby irrevocably waives any and all claims to
immunity in regard to the arbitration proceedings and any proceedings to
enforce, recognize or execute any arbitral award rendered by a tribunal
constituted pursuant to this Agreement including, without limitation,
immunity from service of process, immunity from jurisdiction of any court,
and immunity of such of its property as is of a commercial nature from
execution.
ARTICLE XV
GOVERNING LAW AND STABLIZATION
15.1 This Agreement shall be governed by the laws of Poland and
international treaties which Poland has adopted.
15.2 The Minister on behalf of the Treasury acknowledges that the
Partnership has entered into this Agreement in reliance on the Polish law
as in existence on the date the Partnership executes this Agreement,
particularly the laws and ordinances relating to royalties, taxation, the
export of Oil, the sale of Natural Gas, and the repatriation of profits.
The Minister on behalf of the Treasury hereby represents that all rights
granted to the Partnership hereunder are in conformity with Polish law as
in effect on the date the Partnership executes this Agreement, as such law
applies to the Partnership. In the event that any change to the law of
Poland occurs or the Government takes any other action which restricts,
divests or limits any rights or benefits accruing to the Partnership or
which increases the Partnership's obligations or costs of operation under
this Agreement or under the law of Poland, the Partnership may, at any time
thereafter so notify the Minister in writing. Promptly upon receipt of such
notice, the Minister and the Partnership shall meet to negotiate in good
faith and agree upon the modifications which need to be made to the terms
of this Agreement to restore the Partnership's rights and benefits to a
level equal to what they would have been had such change not occurred, or
upon such other remedy as they agree may be appropriate. In the event the
Parties are unable to agree within ninety (90) days after the Partnership's
notice to the Minister upon the modifications which are needed to the
Agreement or upon such other remedy as may be required, then either Party
may at any time thereafter refer the matter or matters in dispute to
arbitration pursuant to Article XIV.
ARTICLE XVI
MINING USUFRUCT FEES & OTHER PAYMENTS
16.1 The Partnership shall pay the Treasury a mining usufruct fee as
follows:
16.1.1 As mining usufruct fee with respect to the Prospecting and
Exploration for the eight Blocks, the Partnership shall pay the Polish
zloty equivalent of the following amounts:
a. US$ 20,000 within 60 days from obtaining the eight Exploration
Concessions;
b. US$ 40,000 within one year from obtaining the eight Exploration
Concessions; and
c. US$ 40,000 within two years from obtaining the eight Exploration
Concessions
16.1.2 Moreover, the Partnership will be obligated to pay the Treasury a
mining usufruct fee with respect to Exploitation in Zlotys based on
the market value of the reserves in place. The fee will be negotiated
by the Treasury and the Partnership within the range of 0.01 to 0.5
per mil of market value of the reserves in place as determined in
accordance with standard international petroleum industry engineering
criteria. The mining usufruct fee shall:
a. apply to only so much of the reserves that can be extracted using
conventional primary recovery methods;
b. be negotiated and determined with respect to each Mining Area at
the time the boundaries thereof are designated pursuant to
Article 5.2 above; and
c. be payable in five consecutive annual installments, commencing on
the date such Mining Area is designated and the applicable
Exploitation Concession is issued.
16.1.3 The mining usufruct fee shall be paid to the following bank
account:
Ministry of Environmental Protection, Natural Resources and Forestry
Biuro Administracyjno-Budzetowe
NBP 0/0 Warszawa
account # 10101010-680-223-1
title: 28.31.3996 S 64 - mining usufruct fee;
or such other account as the Minister may notify to the Partnership in
writing.
16.2 The concession fee referred to in Article 85 of the Geological and
Mining Law of February 4, 1994 shall amount to the zloty equivalent of US
$12.500 per each Exploration Concession covering one Block, payable in full
within sixty (60) days from obtaining the Exploration Concession. Sixty
percent (60%) of the fee shall constitute the revenue of the local
authorities on whose territory the activities under the Concession are to
be conducted and the remaining forty percent (40%) shall constitute the
revenue of the National Fund for Environmental Protection and Water
Management.
16.3 The Partnership envisages that it will spend the equivalent of US
$5,000,000 during the First 3-Year Exploration Period and US$ 10,000,000
during the Second 3-Year Exploration Period, subject to positive results of
the first phase of exploration.
ARTICLE XVII
DESIGNATED ENTITY
17.1 The Minister may designate an entity of its choice to represent the
Minister for the purposes of receipt and safekeeping of reports,
interpretations, maps, data, cores, samples, and other information.
17.2 The appointment of a Designated Entity notwithstanding, the Treasury
shall remain responsible to the Partnership for all of its obligations to
the Partnership as provided herein.
17.3 The Minister shall notify the Partnership in writing of its naming of
the Designated Entity, of the specific purpose to which such designation
relates, and of all communication and other details which the Partnership
requires to know about such Designated Entity. Such notification shall be
made in good time to enable the Partnership to comply with its obligations
hereunder and so as not to disrupt or delay Concession Operations.
ARTICLE XVIII
NOTICES
18.1 All notices, applications, requests, agreements, approval, consents,
instructions, delegations, waivers or other communications to be given,
submitted or made hereunder by any Party to another shall be sufficiently
given if in writing and delivered in person to an authorized representative
of the Party to whom such notice is directed or when sent by registered
post, postage paid, or by telegram, telex, facsimile or cable, to the
address or addressee of the other Party as follows, or to such other
address as a Party may specify in writing to the other:
for the Treasury Jacek Wroblewski, Vice-Director
or the Minister: Department of Geology and
Geological Concessions
Ministry of Environmental Protection,
Natural Resources and Forestry
52/54 Wawelska Street, 00-922 Warsaw
Facsimile: 25-15-03
for the
Partnership: David N. Pierce
FX Energy Poland Sp. Zo.o. and Partners,
Commercial Partnership
Wal Miedzeszynski 646,
03-994 Warszawa Poland
Facsimile: 671-66-4O, 671-97-72
18.2 Notices when given in terms of Article 18.1 shall be made in the Polish
language, shall be effective when delivered, if delivered during business hours
of working days; if received outside business hours such notices shall be
effective on the next following working day.
18.3 The Partnership shall appoint, by written notice to the Minister, a
plenipotentiary for cooperation with the Minister and other state authorities.
Such plenipotentiary shall be authorized to act on behalf of the Partnership in
any matters regarding this Agreement. The first such plenipotentiary shall be
Mr. David N. Pierce. Any removal of plenipotentiary and appointment of a new one
shall require a written notice to the Minister.
IN WITNESS WHEREOF, the representatives of the Parties to this Agreement being
duly authorized have hereunto set their hands and have executed these presents
this 14th day of October, 1997.
The Minister of Environmental Protection,
Natural Resources and Forestry
of The Republic of Poland.
/s/ Krzysztof Szamalek, Secretary of State
FX Energy Poland Sp. z o.o and Gasex Production Company, Commercial Partnership
/s/ David N. Pierce
[SCHEDULE A CONSISTS OF MAP AND COORDINATES OF THE MINING USUFRUCT AREA]
[Attached is outline map of section of Poland in which concessions are located
containing grid of concession boundaries and numbers]
Schedule B
[Description of certain parcels excluded from concessions described]
Schedule C
[Description of certain parcels excluded from concessions described]
EARN-IN AND EXPLORATION LETTER OF INTENT
THIS EARN-IN AND EXPLORATION LETTER OF INTENT (this "Letter") between
Homestake Mining Company of California, a California corporation having its
principal place of business at 650 California Street, San Francisco, California
94108 ("Homestake") and FX Energy, Inc., a Utah corporation having its principal
place of business at 3006 Highland Drive, Suite 206, Salt Lake City, Utah 84106
("FX"), is entered into as of the date of the execution hereof (the "Effective
Date") to establish terms and conditions upon which Homestake and FX contemplate
engaging in exploration for precious metals in an area of the Republic of Poland
more particularly described in Exhibit A hereto (the "Area of Interest")
1. Association; Exclusivity of Parties' Dealing in Area of Interest. The
parties enter into an exclusive association with each other for the purpose of
engaging in reconnaissance, exploration for, and, if warranted, development and
mining of precious metals in the Area of Interest on the terms and conditions
contained in this Letter. Pursuant to such agreement, all concessions,
usufructs, mining titles, mineral interests, or other property interests or
rights to explore or exploit base or precious metals in the Area of Interest
held by either party ("Mineral Entitlements") and all exploration and
exploitation of base and precious metals therein shall be held by and carried
out for the joint benefit of Homestake and FX in accordance with this Letter and
the other agreements contemplated herein. For greater clarity, the Mineral
Entitlements subject to this Letter include but are not limited to
(a) that certain usufruct and related concessions for the exploration
of precious metals held by Sudety Mining Company Sp. z.o. o., a wholly-
owned subsidiary of FX ("Sudety") and more fully described in that certain
Reconnaissance and Standstill Agreement ("Standstill Agreement") between
Homestake and FX made the 27th day of September 1996 (the `Sudety
Prospect"), and
(b) any exploration and exploitation usufructs and related
concessions resulting from the applications now contemplated to be made by
FX for the joint benefit of the parties for Gold Concession area 43 and 65
shown on Exhibit B hereto (the "Applications")
2. Letter of Intent, Definitive Agreements.
(a) The parties acknowledge that this Letter is intended to describe
the principal financial and other business terms and conditions of the
association contemplated between the parties.
(b) Promptly upon execution of this Letter the parties will consult
with Polish counsel to develop and negotiate agreements to implement the
objectives of this Letter, taking into account Polish law and institutions
as well as tax considerations of the parties. Notwithstanding the
foregoing, the parties now contemplate that such agreements will include a
master agreement setting forth the rights and duties of the parties with
respect to entities that may be organized under Polish law to hold the
Mineral Entitlements and to explore and exploit properties for gold, an
operating agreement setting forth the terms and conditions pursuant which
exploration and exploitation operations in Poland will be conducted, and a
shareholder loan agreement providing for the funding of one or more Polish
entitles (the "Definitive Agreements"). The parties acknowledge that it
may be necessary to vary the Definitive Agreements from those contemplated
herein in order to implement the objectives of this Letter under Polish
law. The parties agree to cooperate in selecting and implementing such
forms of agreement and methods of transfer which best accomplish such
objectives, including but not limited to the form of the beneficial
interests to which FX is entitled.
(c) The parties agree to attempt in good faith to develop, draft, and
execute the Definitive Agreements within 90 days following the Effective
Date.
3. Term. The exclusive association contemplated by the parties shall
continue for a term of six years from the date that the parties execute the
Definitive Agreements (the "Term"). Following such Term, neither party shall
have any obligation to the other except as provided in the Definitive
Agreements.
4. Fundamental Rights ands Duties of the Parties. The fundamental rights
and duties contained in the Definitive Agreements will, inter alia, include the
following:
(a) The parties contemplate that upon the execution of the Definitive
Agreements, FX shall convey to Homestake 100% of all of the capital stock
of Sudety and any other Polish affiliate of FX then holding a Mineral
Entitlement or application therefor subject to the rights of FX provided
for herein.
(b) Homestake shall expend or cause to be expended not less than
$500,000 during each 12-month period in the six-month Term (each being a
"Year"),
(i) for exploration and development for precious metals in the
Area of Interest, and
(ii) to maintain in good standing each Mineral Entitlement
subject to the terms and conditions of this Letter.
During the first two Years, such expenditures shall be commitments on the
part of Homestake ("Committed Expenditures"); thereafter such $500,000
expenditure shall be a condition of continuing the Definitive Agreements in
effect. If Homestake does not expend such $500,000 in any Year, it may pay
FX the difference between $500,000 and the amount expended or, if the
failure arises from conditions reasonably beyond Homestake's control, such
as failure to obtain usufructs, concessions, permits, etc., Homestake may
roll the obligation into the next Year.
The following costs shall be included in qualifying expenditures:
(i) funds expended on or for the direct or indirect benefit of
the Mineral Entitlements by Homestake or its affiliates in Poland; and
(ii) overhead of Homestake's affiliates, including but not
limited to, Sudety;
(iii) funds expended for the direct benefit of the Mineral
Entitlements by Homestake's Polish affiliates outside of Poland; and
(iv) charges for the time, fringes, and costs of Homestake's
technical personnel and consultants who render services with respect
to Mineral Entitlements, e.g., geologists, engineers, metallurgists,
and environmental personnel, wherever rendered.
For greater clarity, no home office overhead or other charges incurred in
the United States by executive or administrative personnel of Homestake
shall qualify as expenditures. Expenditure by Homestake of the Committed
Expenditures in the first Year (wherever and however expended) shall
satisfy the $40,000 in expenditures previously committed to by Homestake
with respect to the Sudety Prospect in the Standstill Agreement (including
the supplement made by letter agreement dated April 9, 1997). Upon such
expenditure of $40,000, the Standstill Agreement shall terminate.
(d) Upon execution of the Definitive Agreements, Homestake will pay
FX $100,000. Unless Homestake sooner terminates the Definitive Agreements,
Homestake will pay to FX an additional $250,000 at December 31, 1999.
(e) Upon execution of the Definitive Agreements, Homestake shall also
reimburse FX the $88,000 for precious expenditures of FX incurred in
connection with the Sudety Prospect and such additional amounts as are
reasonably spent by FX in agreement with Homestake in respect of the
Applications.
(f) Homestake may terminate the Definitive Agreements at any time
after completing the Committed Expenditures or paying FX the difference
between the amounts so committed and the amounts actually expended;
provided, however, that in the event the government of Poland establishes
the exploitation fee payable to Poland by law in connection with the mining
of precious metals (the "Exploitation Fee") at 6% or more with respect to
one or more Mineral Entitlements, Homestake may abandon such Mineral
Entitlements or terminate the Definitive Agreements without completing the
Committed Expenditures or making any payments in lieu thereof except that
if Homestake terminates the Definitive Agreements or abandons any Mineral
Entitlement prior to September 1 of any calendar year and Homestake had not
then made all payments and completed all activities required to maintain in
good standing through December 31 of the same calendar year, in the case of
termination, all of the Mineral Entitlements or, in the case of
abandonment, those Mineral Entitlements subject to such abandonment, then
Homestake shall reimburse FX the prorated amounts of such payments and the
cost for the remainder of such calendar year.
(g) Upon any termination of the Definitive Agreements by Homestake
prior to expiration of the Term,
(i) Homestake shall quitclaim to FX all the capital stock of
Sudety and all other direct and indirect interests in the Mineral
Entitlements, and
(ii) Homestake will not thereafter acquire any Mineral
Entitlements in the Area of Interest for two years after such
termination without offering them to FX at cost.
In the event of any such termination by Homestake of one or more Mineral
Entitlements except a termination arising out of the establishment by the
government of an Exploitation Fee of 6% or more as provided above,
Homestake shall be entitled to a 1% Net Smelter Returns royalty on the
terms and conditions contained in Exhibit C in respect of all of the
Mineral Entitlements.
(h) In the event that Homestake determines that it will terminate the
Definitive Agreements for any reason, Homestake will use good faith efforts
to effect such termination as promptly thereafter as possible.
(i) FX will assist Homestake in exploration and development
activities in Poland and will provide advice with respect to dealing with
the government of Poland and its subdivisions in:
(i) applying for usufructs, concessions, and other permits, in
lobbying in connection with mineral activities;
(ii) clarifying or establishing the terms that apply to the
exploration and exploitation of precious metals, whether legislative
or administrative in nature;
(iii) arranging for and engaging employee; and
(iv) obtaining services, materials, and equipment.
In performing any such services at Homestake's request, FX shall be
reimbursed the salaries, fringes, and reasonable out-of-pocket expenses of
its employees who provide such services in Poland, but not including any
home office or executive overhead. He shall have the right to represent
that its activities in Poland are being conducted in association with FX.
(j) From time to time and within 120 days following receipt of notice
from Homestake of a decision to construct a mine on any Mineral
Entitlement, FX shall have the right to choose to take one of the following
three economic interests with respect to such Mineral Entitlement:
(i) a 25% working interest with respect to such Mineral
Entitlement. If FX Elects a working interest, FX will pay for such
interest the amount determined by the following formula: 25%
multiplied by 250% multiplied by [the total expenditures and
reasonable allocations made with respect to the relevant Mineral
Entitlement to the date of election, less $6MM]. The phrase "working
interest" means a full participation responsible for providing 25% of
all of funds and costs reasonably required to construct and operate
the mine, and entitled to enjoy 25% of all of the financial benefits
therefrom. Such 25% working interest may take the form of a 25%
shareholding in the entity holding the relevant Mineral Entitlement or
may be arranged by contract as the parties may agree in the Definitive
Agreements. FX will be entitled to certain procedural rights to
protect any 25% working interest it elects in the form of a
shareholding. Such protections shall include provision that Homestake
will not sell or encumber the relevant Mineral Entitlement without the
prior written consent of FX, not to be unreasonably withheld, and such
other provisions as the parties may agree in the Definitive
Agreements.
(ii) A Net Smelter Royalty on the terms and conditions attached
as Exhibit C of 6% less the percentage Exploitation Fee payable with
respect to the relevant Mineral Entitlement; or
(iii) a Net Proceeds royalty of 7.5% on the terms and
conditions attached as Exhibit D.
(k) Before the abandonment of any Mineral Entitlement, such Mineral
Entitlement will first be offered to FX at no cost to FX.
(l) In the event that FX selects a 25% working interest in any
Mineral Entitlement, a Homestake affiliate shall be the operator of the
properties subject to the Mineral Entitlement on substantially the same
terms and conditions and with substantially the same powers and duties as
are customarily exercised by or applied to joint venture operators of like
properties in the United States and Canada, including the right to manage,
direct, and control operations. In connection with the Definitive
Agreements, the parties shall agree on any fee to be paid to the operator.
(m) Homestake will provide FX with copies of all drill hole logs and
assays obtained from the properties subject to the Mineral Entitlements.
In addition, the parties will create a Technical Committee which will have
regular access to all data and technical reports with respect to
exploration, development, and mining of the properties subject to the
Mineral Entitlements. The Technical Committee shall have the opportunity
to review and comment on the draft of any feasibility study prepared in
contemplation of building any mine.
(n) Homestake shall have 90 days following the execution of the
Definitive Agreements to perform a due diligence examination both in the
United states and in Poland with respect to FX, Sudety, and the Sudety
Prospect. Such examination shall extend to matters of title, environment,
physical condition, financial condition, capital structure, contractual
obligations, permits, obligations and liabilities, and reputation. FX will
cooperate with Homestake and its auditors and attorneys and make available
for their examination, at Homestake's request and cost, all of its records
and books as they pertain to Sudety and the Sudety Prospect and all of the
books and records of Sudety. In the event that Homestake is not satisfied
with the results of its due diligence examination for any reason, Homestake
may terminate the Definitive Agreements without liability or obligation of
any kind including the Committed Expenditures.
5. Reconnaissance Program for Area of Interest. The parties intend to
propose to the government of Poland an agreement to perform and pay
approximately $250,000 for reconnaissance in the Sudety Mountains within the
area described on Exhibit E over an 18-month period. In return for the data
resulting from such reconnaissance, the government will be asked for gold
exploration and exploitation in the area subject to such reconnaissance. If the
parties enter into such agreement with the Polish government, the cost will be
funded by Homestake and qualify as Committed Expenditures and as the subsequent
annual expenditures contemplated in this Letter.
6. Covenant to Keep Capital Stock Free. FX agrees that until the
Definitive Agreements are executed, FX will keep the stock of Sudety and any
other FX affiliate holding a Mineral Entitlement free and clear of mortgages,
pledge, liens, and security interests.
7. No Obligation Outside of Area of Interest. Nothing in this Letter is
intended to create any obligation, inside or outside of Poland, of either party
to the either with respect to Mineral Entitlements or any other property
interests other than those for precious metals located inside of the Area of
Interest; each party is free to engage in activities for its own account without
obligation to the other,
(i) with respect to minerals other than base and precious metals; and
(ii) with respect to precious metals outside of the Area of Interest.
8. Compliance with Law; Foreign Corrupt Practices Act. Homestake and FX
shall perform and cause all of their affiliates to perform all activities and
operations relating to the subject matter of this Letter and the Definitive
Agreements in accordance with the United States Foreign Corrupt Practices Act
(15 U.S.C. Sections 78dd-1, et seq.) and the laws of the Republic of Poland.
9. Confidentiality of Information; Press Releases. Except as otherwise
provided in this Letter or as required by law or the rules of any stock exchange
on which the stock of either party is traded, both parties shall, until November
30, 1997 or such time as they agree otherwise, treat all data, reports, records,
and other information relating to this agreement, the Mineral Entitlements and
their activities hereunder as confidential. Each party shall be free to issue
press release and make public announcements with respect to this Letter or the
transactions contemplated by it but before doing so shall afford the other a
reasonable opportunity to review and comment on such press release or public
announcement. Neither party shall issue any release or announcement that
includes the name of the either without receiving the other's written consent,
which consent shall not be unreasonably withheld, conditioned, or delayed.
10. Definition of Affiliate. For purposes of this Letter, "Affiliate"
shall mean any person, partnership, joint venture, corporation, or other form of
enterprises which directly or indirectly controls, or is controlled by, or is
under common control with, a signatory. For purposes of the preceding sentence,
the word "control" shall mean possession, directly or indirectly, of the power
to direct or cause direction of management and policies through ownership of
voting securities, contract, voting trust, or otherwise.
11. Notices. All notices under this Letter shall be in writing and shall
be delivered in person or sent by registered or certified mail, postage prepaid,
telecopier or other means providing for receipt of the communication in written
form. Notices sent by certified or mail shall be effective on the next business
day after the date of actual delivery. Notices sent by telecopier shall be
effective on the next business day after the day of transmission, provided that
the sending party has received electronic confirmation of successful
transmission. Until a change of address is so given, notices shall be addressed
as follows:
If to Homestake: Homestake Mining Company of California
650 California Street, 11th Floor
San Francisco, California 94108
Attn: Dennis B. Goldstein
Telephone: (415) 981-8150
Telecopy: (415) 397-0952
If to FX: FX Energy, Inc.
3006 Highland Drive, Suite 206
Salt Lake City, Utah 84106
Attn: David N. Pierce
Telephone: (801) 486-5555
Telecopy: (801) 486-5575
13. Standstill. From the Effective Date and continuing through November
30, 1997, FX will not initiate discussions with, respond to inquiries about,
negotiate with, enter into any conveyance, agreement or transaction with, any
person or company other than Homestake regarding the earn-in-, sale, conveyance,
other disposition, or acquisition of all or any Mineral Entitlement or base or
precious metal economic interest, investment, or participation in the Area of
Interest. This Letter supersedes Section 3 of the Reconnaissance and Standstill
Agreement.
14. Entire Agreement; Effect. This Letter and the Reconnaissance and
Standstill Agreement contain the entire agreement of the parties related to its
subject matter and state all the consideration, express or implied, due or owed
from, to or by each party in connection with its subject matter, other than the
implied covenants of good faith and fair dealing. Except for sections 2(b),
2(c), 6, 9, 13, this section 14, and the obligation of both parties to negotiate
and execute the Definitive Agreements in good faith, all of which are intended
to be binding, this Letter shall be non-binding until its subject matter is
reduced to writing and executed by both parties in the form of the Definitive
Agreements.
AGREED TO ON BEHALF OF FX ENERGY, INC.
By /s/ David N. Pierce, President
AGREED TO ON BEHALF OF HOMESTAKE MINING
COMPANY OF CALIFORNIA
By /s/ W.F. Lundquist, Vice president-Exploration
OPTION AGREEMENT
This Option Agreement (this "Agreement"), is entered into effective as of July
18, 1997, between and among Polskie Gornictwo Naftowe I Gazownictwo S. A.,
Oddzial Buro Geologiczne - GEONAFTA, a Polish joint stock company ("POGC") and
FX Energy, Inc., a Nevada corporation ("FXEN") and APACHE Overseas, Inc., a
Delaware corporation ("APACHE").
RECITALS
A. Through the support and cooperation of POGC, FXEN and APACHE (through
Polish subsidiaries) have acquired certain rights to explore for and
exploit natural gas and oil in the Lublin region of Poland, southeast of
Warsaw, under the FX/APA Usufruct (as defined in this Agreement) pursuant
to four Mining Usufruct Agreements. A portion of these rights pertain to
lands where POGC participation is required.
B. POGC has acquired certain rights to explore for natural gas and oil in the
same region, under the POGC Usufructs (as defined in this Agreement). In
addition, POGC has acquired a substantial amount of geological and
geophysical data in the Lublin region, and has generously shared this data
with FXEN and APACHE.
C In view of the mutual interests of POGC, FXEN and APACHE in the Lublin
basin, FXEN and APACHE wish to grant to POGC the option to participate with
them in operations on the FX/APA Usufruct Area and POGC wishes to grant to
FXEN and APACHE the option to participate with POGC in operations on the
POGC Usufruct Area.
NOW, THEREFORE, in consideration of the foregoing recitals, which are
incorporated herein by this reference, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
DEFINITIONS
"Participation Interest(s) shall have the meaning described in Article 2.3.
"Hydrocarbon Concession Block(s)" refers to one or more of the 480 numbered
rectangular areas, each encompassing approximately 1,000 square kilometers,
which in the aggregate comprise a grid promulgated by the Bureau of Geological
Concessions for the purpose of identifying hydrocarbon concession areas.
"AMB Usufruct" means that certain Mining Usufruct Agreement dated July 18, 1997,
between AMB Production Company Sp. z o.o. and Company, Commercial Partnership,
and the State Treasury of the Republic of Poland, covering the following eight
Hydrocarbon Concession Blocks: no. 319, 320, 339, 340, 359, 360, 379, 380.
"AMB&Gasex Usufruct" means that certain Mining Usufruct Agreement dated July 18,
1997, between AMB Production Company Sp. z o.o. and Gasex Production Company Sp.
z o.o., Commercial Partnership, and the State Treasury of the Republic of
Poland, covering the following seven Hydrocarbon Concession Blocks: no. 257,
258, 277, 278, 297, 317, 318.
"Gasex Usufruct" means that certain Mining Usufruct Agreement dated July 18,
1997, between Gasex Production Company Sp. z o.o. and Company, Commercial
Partnership, and the State Treasury of the Republic of Poland, covering
Hydrocarbon Concession Block no. 298.
"Lubex Usufruct" means that certain Mining Usufruct Agreement dated December 22,
1996, between Lubex Petroleum Company Sp. z o.o. and the State Treasury of the
Republic of Poland, covering the following eight Hydrocarbon Concession Blocks:
no. 255, 275, 295, 296, 316, 336, 337, and 338.
"FX/APA Usufruct(s)" refers to one or more of the following: the AMB Usufruct,
the AMB&Gasex Usufruct, the Gasex Usufruct and the Lubex Usufruct.
"POGC Usufruct(s)" refers to one or more of the following: the Stezyca-
Maciejowica usufruct ("Stezyca"), the Swidnik-Ciecierzyn No. 201/94 usufruct
("Ciecierzyn"), the Ryki-Zyrzyn No. 13/94/p usufruct ("Ryki-Zyrzyn"), the
Zelechow-Kock No. 71/95/p usufruct ("Zelechow"), the Wola Obszanska-Cewkow No.
9/97/p usufruct ("Wola Obszanska"), and the Grabowiec-Rachanie No. [to be
issued] usufruct to be issued ("Grabowiec"), all of which are situated entirely
or partially within the Hydrocarbon Concession Blocks in the FX Usufruct area.
ARTICLE 1. IDENTIFICATION OF INTERESTS
1.1 FXEN and APACHE, through wholly-owned subsidiaries, are the holders of
rights to explore for and exploit natural gas and oil ("Hydrocarbon
Rights") in those lands covered by the FX/APA Usufructs, three of which
Usufructs require that FXEN and APACHE agree with POGC on terms by which
POGC may participate with FXEN and APACHE within the applicable FX/APA
Usufructs . The purpose of this Agreement is to set out these terms. POGC,
directly or through wholly-owned subsidiaries, is the holder of Hydrocarbon
Rights in those lands covered by the POGC Usufructs.
1.2 FXEN and APACHE have entered into agreements dividing the beneficial
interest in the FX/APA Usufructs between them initially on a 50./O/50%
basis. FXEN and APACHE plan to arrange for each of the FX/APA Usufructs and
the concessions issued pursuant thereto to be held by a Polish commercial
partnership comprised of one Polish limited liability company owned by FXEN
and another Polish limited liability company owned by APACHE.
1.3 FXEN and APACHE are in the process of drafting the documents which will
govern their respective rights and obligations, which at present include
Partnership Agreements, Joint Operating Agreements, and Accounting
Procedure Agreements (collectively, and including substitute documents, the
"Operating Documents"). FXEN and APACHE have agreed that APACHE will be
responsible for management and control of operations and of the
partnerships which will hold the Usufructs and the concessions.
1.4 FXEN and APACHE have reviewed and analyzed a substantial amount of existing
data pertaining to the FX/APA Usufruct Area and plan to review and analyze
additional existing data. FXEN and APACHE also plan to acquire a
significant amount of new seismic data during the remainder of 1997. FXEN
and APACHE are formulating plans for future activity, and hope to drill at
least four exploratory wells in the FX/APA Usufruct Area during 1998, and
at least three more during 1999, subject to data supporting prospective
drill sites.
ARTICLE 2. GRANT OF OPTIONS TO POGC
2.1 FXEN and APACHE hereby grant to POGC the following options to participate
in the FX/APA Usufructs:
a. an option to take an interest of up to twenty-five percent (25.00%) in
all or part of the Lubex Usufruct;
b. an option to take an interest of up to thirty three and one-third
percent (33.33%) in all or part of the AMB Usufruct;
c. an option to take an interest of up to forty percent (40.00%) in all or
part of the Gasex Usufruct; and
d. an option to take an interest of up to thirty three and one-third
percent (33.33%) in all or part of the AMB&Gasex Usufruct.
2.2 POGC may exercise its option in each Usufruct on a block by block basis;
that is, it may take an interest in one, or several, or all of the
Hydrocarbon Concession Blocks in a particular Usufruct. In order to
maintain uniform interests, when POGC first designates the percentage
interest (other than zero percent) it will take in a block within a
particular Usufruct, then it must thereafter take either the same
(non-zero) percentage, or it may take zero, with respect to all other
blocks in the same Usufruct.
2.3 The FX/APA Usufructs cover only a small portion of the land in certain
Hydrocarbon Concession Blocks, either because of other existing Usufructs
or because the blocks lie outside the territory of Poland. Therefore, the
following pairs of blocks will be considered just one block for purposes of
the "block by block" option described in Article 2.2.
a Block 257 and Block 258
b. Block 277 and Block 278
c. Block 339 and Block 340
d. Block 360 and Block 380
2.4 A discovery well in one block may lead to the grant of a single
exploitation concession covering land within that block as well as
contiguous land within an adjacent block. In such case, the ownership
interests of the parties in such exploitation concession shall be the same
as their interests in the discovery well, whether or not a First Block Well
(defined below) has been drilled in the adjacent block. For all purposes of
this Agreement, including the "block by block" option, the land covered by
the exploitation concession shall be considered to be in the block where
the initial discovery was made.
ARTICLE 3. EXERCISE OF OPTION BY POGC
3.1 APACHE, as Operator, will provide at least 60 days' notice to POGC of its
intention to drill a first exploratory (not development or appraisal) well
(the "First Block Well") in each block (as that term is modified by
Articles 2.3 and 2.4) in the FX/APA Usufruct Area. The notice of a proposed
First Block Well shall include an estimate of costs, an anticipated spud
date, and technical information supporting the well proposed such as
seismic sections, maps and petrophysical logs (where available). If POGC
wishes to take an interest in such block it may do so by exercising its
option as provided below and by participating in such First Block Well. If
POGC does not exercise its option and participate in any particular First
Block Well, it shall have no further interest in the block in which such
First Block Well was drilled.
3.2 POGC shall have thirty (30) days from the date of notice of a First Block
Well to give written notice to APACHE and FXEN that POGC has elected to
join in the proposed well and in the related block. If POGC elects to
exercise its option, it shall designate in the notice of election the
amount of interest it wishes to take (its "Participation Interest"), which
may be any amount up to the maximum shown in Article 2.1, subject to the
provisions for uniform interest in Article 2.2. If POGC does not provide a
notice of election within said thirty (30) day period such failure shall be
deemed conclusively and irrevocably an election by POGC not to exercise the
applicable option. Any delay in the actual spud of the well shall not
extend the time for exercise of the option.
3.3 If POGC makes an affirmative election to join in a First Block Well, then
it shall be responsible for its Participation Interest share of all costs
of such well, regardless of the date such costs were incurred. In addition,
POGC shall also be responsible for its Participation Interest share of all
other costs related to the applicable block which accrue on or after (but
not before) the actual spud date of the applicable First Block Well,
including any usufruct fees, concession fees, training fees, general and
administrative costs, geological and geophysical costs, drilling,
production and operating costs, and taxes and royalties, all in accordance
with the Operating Documents.
3.4 If POGC makes an affirmative election to participate in a First Block Well
it shall, within thirty (30) days after its notice of election, become a
signatory to the applicable Operating Documents.
ARTICLE 4. GRANT OF OPTION ON CIECIERZYN; FIRST REFUSAL ON MELGIEW AND GLINNIK
4.1 In the event APACHE and FXEN decide to conduct exploratory seismic or
drilling activities in the area covered by POGC's Swidnik-Ciecierzyn No.
201/94 exploitation concession and usutruct, POGC will give its permission
and full support to such activity. In the event APACHE and FXEN elect to
apply for an exploitation concession covering POGC's Swidnik-Ciecierzyn No.
201/94 exploitation concession and usufruct, they shall first acquire 3-D
seismic over the presumed field and drill one well into the applicable
producing horizon, all at the sole cost of APACHE and FXEN, whereupon POGC
will promptly withdraw and relinquish its exploitation concession and
usufruct and will join (up to 40% Participation Interest) with APACHE and
FXEN in the application for a new exploitation concession covering the
applicable field area, with all parties sharing costs according to their
Participating Interests. The new exploitation concession shall be held in a
Polish commercial partnership formed especially for such purpose by POGC,
FXEN and APACHE. If POGC elects to take an interest of 33.3% or more, then
it shall have the right to be operator or to designate the operator. If
POGC elects to take an interest of 33.3% or more, then neither APACHE nor
FXEN may hold an interest greater than POGC's interest without the consent
of POGC.
4.2 POGC hereby grants to APACHE and FXEN the right of first refusal to
participate in the following POGC concessions: Melgiew No. 17/951p, Glinnik
No. 60/95/p, and StezycaMaciejowica No. 1 81961p, all of which are situated
entirely or partially within the Hydrocarbon Concession Blocks in the
FX/APA Usufuct area. Specifically, POGC will not allow any other party to
acquire any interest in any of the POGC concessions listed in this Article
4.2 unless the identical offer has already been made to and rejected by
FXEN and APACHE after thirty (30) days' notice.
ARTICLE 5. GRANT OF OPTIONS TO FXEN AND APACHE
5.1 POGC hereby grants to APACHE and FXEN the following options to participate
in the POGC Usufructs:
a. an option to APACHE to take an interest of up to thirty three and
one-third percent (33.33%) and an option to FXEN to take an interest of up
to thirty three and one-third percent (33.33%) in the Ryki-Zyrzyn No.
13/94/p concession and usufruct;
b. an option to APACHE to take an interest of up to thirty three and
one-third percent (33.33%) and an option to FXEN to take an interest of up
to thirty three and one-third percent (33.33%) in the Zelechow-Kock No.
71/95/p concession and usufruct;
c. an option to APACHE to take an interest of up to thirty three and
one-third percent (33.33%) and an option to FXEN to take an interest of up
to thirty three and one-third percent (33.33%) in the Wola Obszanska-Cewkow
No. 9/97/p concession and usufruct; andd. an option to APACHE to take an
interest of up to thirty three and one-third percent (33.33%) and an option
to FXEN to take an interest of up to thirty three and one-third percent
(33.33%) in the Grabowiec-Rachanie No. [to be issued] concession and
usufruct to be issued.
5.2 The options granted to FXEN and APACHE shall not include the entire land
area covered by the applicable POGC Usufruct, but only so much of the
applicable POGC Usufruct as lies within Hydrocarbon Concession Blocks
included in the FX/APA Usufructs as in effect on the date of this
Agreement.
ARTICLE 6. EXERCISE OF OPTION BY FXEN AND APACHE
6.1 POGC, as Operator, will provide at least 60 days' notice to FXEN and APACHE
of its intention to drill a First Block Well in each POGC Usufruct. The
notice of a proposed First Block Well shall include an estimate of costs,
an anticipated spud date, and technical information supporting the well
proposed such as seismic sections, maps and petrophysical logs (where
available). If either FXEN or APACHE wishes to take an interest in such PO
GC Usufruct it may do so by exercising its option as provided below and by
participating in such First Block Well. If either APACHE or FXEN does not
exercise its option and participate in any particular First Block Well, it
shall have no further interest in the POGC Usufruct in which such First
Block Well was drilled.
6.2 FXEN and APACHE each shall have thirty (30) days from the date of notice of
a First Block Well to give written notice to POGC that it has elected to
join in the proposed well and in the related POGC Usufruct. If either FXEN
or APACHE elects to exercise its option, it shall designate in the notice
of election the amount of interest it wishes to take (its "Participation
Interest"), which may be any amount up to the maximum shown in Article 5.1.
If either FXEN or APACHE does not provide a notice of election within said
thirty (30) day period such failure shall be deemed conclusively and
irrevocably an election by FXEN or APACHE, as applicable, not to exercise
the applicable option. Any delay in the actual spud of the well shall not
extend the time for exercise of the option.
6.3 If either FXEN or APACHE makes an affirmative election to join in a First
Block Well, then it shall be responsible for its Participation Interest
share of all costs of such well, regardless of the date such costs were
incurred. In addition, FXEN or APACHE, as applicable, shall also be
responsible for its Participation Interest share of all other costs related
to the applicable POGC Usufruct which accrue on or after (but not before)
the actual spud date of the applicable First Block Well, including any
usufruct fees, concession fees, training fees, general and administrative
costs, geological and geophysical costs, drilling, production and operating
costs, and taxes and royalties, all in accordance with the Operating
Documents.
6.4 If either FXEN or APACHE makes an affirmative election to participate in a
First Block Well it shall, within thirty (30) days after its notice of
election, become a signatory to a set of operating documents to be prepared
which mirror the Operating Documents referred to in Article 1.3.
6.5 In the event that one of FXEN or APACHE elects to take up its option on a
given Block and the other does not, the party electing to exercise its
option shall also have the right to take up all or part of the share of the
party which has elected not to exercise its option, on giving notice to
POGC to that effect within the time set out in Article 6.2 above. The patty
electing to exercise its option shall not have the right to take an
interest greater than forty nine percent (49%) in the aggregate without the
consent of POGC.
ARTICLE 7. INFORMATION AND CONFIDENTIALITY
7.1 All information and data (geophysical, geological, engineering, production
marketing or otherwise) provided to a party hereunder shall be kept
confidential by such party unless the release of such information to a
third party is required by law. The term during which information is to be
kept secret and confidential shall coincide with the term of this Agreement
or for a period of three years from the effective date of this Agreement,
whichever is later.
7.2 The parties hereto agree to strictly observe and abide by the terms and
conditions governing data received by any of them from the government of
the Republic of Poland or from any party hereto.
7.3 The applicable operating party shall notify each of the other parties
hereto at least monthly of progress toward selection of First Block Wells.
So long as there is any POGC Usufruct, or any Hydrocarbon Concession Block
within the FX/APA Usufruct area, where a First Block Well has not been
drilled, each party hereto shall have access to all data of the other
parties hereto pertaining to the selection of First Block Well drill sites
in which the accessing party has a right to participate, including all
seismic and other geological, geophysical, geochemical and production data,
in order to allow such party to be ready to make its determination whether
or not to exercise its options.
ARTICLE 8. FURTHER ASSURANCE AND ASSISTANCE
The Parties agree to execute and deliver to each other all such additional
documents and instruments and do all such further acts and things as may be
reasonably requested by any Party to effectively carry out the intent of
this Agreement. In particular, POGC will use its best efforts to help
obtain the necessary concessions and permits on behalf of itself, APACHE
and FXEN in those parts of the FX/APA Usufruct area where POGC is or has
the right to be a participant.
ARTICLE 9. ASSIGNMENT; ABANDONMENT
9.1 To the extent that option rights under this Agreement have not yet become
exercisable, the rights and obligations under this Agreement shall be
assigned only to:
a. an affiliate of the assigning party; or
b. a third party (with the prior consent of the other parties hereto
which shall not be unreasonably withheld in the case of a technically
and financially competent assignee) provided that such third party
also receives assignment of all the Usufruct rights of the assigning
party which are still subject to option rights of the other parties
hereto.
After exercise (or expiry, as the case may be) of any option granted
hereunder, the rights of the participating parties in any Usufruct shall be
governed by the Operating Documents which apply to that Usufruct.
9.2 Each party to this Agreement may exercise its rights and perform its
obligations hereunder through one or more subsidiaries, in which case the
term "APACHE", "POGC" or "FXEN", as applicable, shall be deemed to refer to
and include such subsidiary or subsidiaries.
9.3 If any party decides to abandon, relinquish or allow to expire undrilled
any Block that is subject to this Agreement, it shall give notice to the
other parties and an opportunity to take over such Block on terms to be
agreed at the time. The parties shall endeavor to give notice sufficiently
far in advance to allow the other parties adequate time to evaluate, decide
and commence any required operations.
ARTICLE 10. AMENDMENT
This Agreement may only be altered, varied or amended by written instrument
executed by all the parties.
ARTICLE 11. NOTICES
Any notice required to be given pursuant to this Agreement shall be in writing
and shall be given by delivering the same by hand at, or by sending the same by
prepaid first class post (confirmed by telefax/facsimile) or telefax/facsimile
to, the relevant address set out below or such other addresses as any party
wishing to change its address may notify to the other party from time to time.
Any such notice given as aforesaid shall be deemed to have been given or
received at the time of delivery (if delivered by hand), the first working day
next following the day of sending (if sent by facsimile) and the first working
day next following the day of receipt (if sent by post).
FX Energy, Inc. Polish Oil and Gas Company - GEONAFTA
Attn: David N. Pierce Attn: Marek Hoffmann
3006 Highland Drive, Suite 206 ul. Jagiellonska 76
Salt Lake City, UT 84106 03-301 Warsaw, Poland
Telephone:1-801-486-5555 Telephone: 48-22-11-26-06
Fax: 1-801-486-5575 Fax: 48-22-11-28-78
APACHE Overseas, Inc.
Attn: Floyd R. Price
2000 Post Oak Boulevard
Houston, Texas 77056-4400
Telephone:1-713-296-6000
Fax: 1-713-296-6450
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives the day month and year first above
written.
FX Energy, Inc. Polskie Gornictwo Naftowe I Gazownictwo S.A.
By:/s/ David N. Pierce By:/s/ Marek Hoffmann
David N. Pierce, Director Marek Hoffmann, Director
Apache Overseas, Inc.
By:/s/ Floyd R. Price
Floyd R. Price, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1997, AND STATEMENTS OF OPERATIONS FOR THE QUARTER
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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