PARTICIPATION OPTION AGREEMENT
Dated Effective as of February 27, 1998
Between
APACHE OVERSEAS, INC.
and
FX ENERGY, INC.
Pertaining to the Pomeranian Area Concession
PARTICIPATION OPTION AGREEMENT
This Participation Option Agreement (this "Agreement"), is entered into
effective as of February 27, 1998, by and between FX Energy, Inc., a Nevada
corporation ("FXEN"), and APACHE Overseas, Inc., a Delaware corporation
("APACHE").
RECITALS
A. FXEN, through one or more subsidiaries, is the holder of certain rights to
explore for and exploit natural gas and oil (the "Hydrocarbon Rights") in
certain lands in the Pomeranian area of the Republic of Poland pursuant to a
Mining Usufruct Agreement.
B. APACHE wishes to acquire an undivided beneficial interest in the Hydrocarbon
Rights and FXEN is willing to transfer such interests to APACHE and to grant
operational control of the Hydrocarbon Rights to APACHE, all on and subject
to the terms and conditions set forth herein. APACHE and FXEN intend to
accomplish this by arranging for a wholly owned Polish subsidiary of APACHE
to become a partner in the Polish commercial partnership which currently
holds the applicable Usufruct.
C. The parties have agreed to cooperate fully with each other in order to
accomplish their common primary goals to share the Hydrocarbon Rights and to
expedite the exploration and exploitation thereof under the operational
control of APACHE. If and to the extent the applicable law and regulatory
structure permit from time to time, and so long as the same can be
accomplished without adverse tax or other consequences, the parties will work
together to transfer ownership of the Hydrocarbon Rights into separate and
several ownership.
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
"Interest Transfer Documents" shall have the meaning given in Article 1.4.
"Participation Interest(s) shall have the meaning described in Article 1.5.
"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.
"Required Earning Well" shall have the meaning given in Article 2.2.
"First 3-Year Exploration Phase" shall have the meaning given in the Usufruct.
"Second 3-Year Exploration Phase" shall have the meaning given in the Usufruct.
"Pomeranian Usufruct Area" refers to lands covered by the Pomeranian Usufruct in
one or more of the following ten Hydrocarbon Concession Blocks: no. 85, 86, 87,
8%, 89, 105, 108, 109, 129, and 149.
"Pomeranian Usufruct" means that certain Mining Usufruct Agreement dated October
30, 1997, between FX Energy Poland Sp. z o.o. and Partners, Commercial
Partnership, and the State Treasury of the Republic of Poland, represented by
the Minister of Environmental Protection, Natural Resources and Forestry in his
capacity as Concession Authority covering Hydrocarbon Rights in all or
designated portions of those lands comprising the Pomeranian Usufruct Area.
ARTICLE 1. MANNER OF OWNERSHIP AND TRANSFER OF INTERESTS
1.1 The parties acknowledge that this Agreement is intended to describe the
principal financial, business and operational terms and conditions of their
association in connection with the Hydrocarbon Rights.
1.2 The parties have selected the Polish commercial partnership as being the
structure which, in their best judgment, will best implement the terms
contained herein while minimizing the tax costs, administrative overhead
and operational complexity of their association. If and to the extent
possible, from time to time during their association, the parties will use
their commercially reasonable best efforts to utilize a structure which
most closely resembles the usual oil industry method of operating under a
joint operating agreement with several rather than joint ownership of the
Hydrocarbon Rights. As of the date of this Agreement, however, the parties
intend for APACHE to join, through one or more subsidiary Polish limited
liability companies, in the Polish commercial partnership which now holds
the Pomeranian Usufruct.
1.3 The operating documents described in Article 3 will govern the actions,
rights and obligations of the parties, subject to the terms and conditions
of this Agreement. However, for the reasons set forth above in this Article
1, the parties may subsequently elect or be required to use alternative
documents, methods or structures. For example, an obligation to "pay" might
ultimately be changed into an obligation to make an unsecured loan
repayable only out of production revenue. Similarly, the names used herein,
"APACHE", "FXEN" and "POGC", shall be deemed to mean the entities defined
above and/or other entities used or created to serve in their stead to
implement the purposes of this Agreement.
1.4 Subject to the foregoing, and following Apache's timely and irrevocable
election described below in this Agreement, each party shall (or shall
cause its applicable affiliate to) execute such documents and instruments
(the "Interest Transfer Documents") as may be necessary or appropriate in
order that APACHE and FXEN each initially shall own, indirectly through one
or more affiliates, a 50% beneficial interest in the Polish commercial
partnership which is the holder of the Pomeranian Usufruct, if APACHE
elects to exercise its option Apache's full and timely performance of the
obligations set forth in Article 2 below shall be a condition subsequent to
its ownership of its beneficial interest in the Pomeranian Usufruct.
1.5 FXEN and APACHE acknowledge that FXEN may, in its absolute unfettered
discretion, grant to POGC an interest, or an option to acquire or earn an
interest, in the Pomeranian Usufruct, provided that any such agreement with
POGC is reduced to writing before the date on which APACHE is required to
make its election under Article 1.6. If a definitive agreement with POGC
has not been reached before the date on which APACHE's election is
required, and if APACHE makes an affirmative election, then any decision to
grant an interest or option to POGC shall be a joint decision of APACHE and
FXEN. To the extent POGC acquires or earns such interest or exercises such
option, the interest acquired or earned by POGC shall reduce the interests
of both FXEN and APACHE in equal proportions, and FXEN and APACHE shall
share in equal proportions any consideration received therefrom. The
beneficial interest of FXEN, APACHE or POGC at any given time in the
Pomeranian Usufruct is referred to herein as such party's "Participation
Interest".
1.6 Apache hereby agrees to reprocess approximately 1,000 km of existing
seismic in or near the Pomeranian Usufruct Area and to pay all of the costs
thereof. By Xxxxx 00, 0000, XXXX and APACHE shall jointly select the lines
to be reprocessed and FXEN shall be responsible to obtain the applicable
data tapes, to the extent available. APACHE shall have the right,
exercisable at any time within six months after the data tapes have been
made available to APACHE or identified as unavailable, to elect to
participate in the Pomeranian Usufruct. Such election shall be made by
written notice to FXEN, and in no event shall the time for making such
election extend beyond December 31, 1998. If APACHE does not exercise its
election then it shall have no further obligation or right under this
Agreement except for the obligation to reprocess 1,000 km of existing
seismic and pay the costs thereof.
ARTICLE 2. PARTICIPATION OBLIGATIONS
2.1 If APACHE exercises its option then APACHE shall pay all amounts referred
to in the Pomeranian Usufruct that are required to maintain such Usufruct
in full force and effect during the First Three-year Exploration Period,
consisting of the one-time mining usufruct fee, the concession fees, and
the annual training fees.
2.2 If APACHE exercises its option then APACHE thereby shall commit to drill,
test, and complete or abandon, and will pay all of the APACHE and FXEN
Participation Interest share of all costs of drilling, testing, and
abandoning (but not the costs after the decision to run production casing,
which shall be paid in proportion to Participation Interests) the one well
specified in Article 4.3 of the Pomeranian Usufruct. Such one well is
referred to herein as the "Required Earning Well". The Required Earning
Well shall be an exploratory well and not an appraisal or development well.
APACHE will have the ultimate decision in selecting the drilling location
of the Required Earning Well. Apache shall spud the Required Earning Well
in the Pomeranian Usufruct Area at any time it decides within the First
3-year Exploration Period.
2.3 If APACHE exercises its option then APACHE will pay all of the APACHE and
FXEN Participation Interest share of all costs in connection with the
acquisition and processing of: (a) not less than the 600 km of seismic in
the Pomeranian Usufruct area, and (b) all seismic acquired or processed in
the Pomeranian Usufruct Area until such time as the Required Earning Well
has been drilled and completed or abandoned.
2.4 If APACHE exercises its option then APACHE will pay all of the APACHE and
FXEN Participation Interest share of ail costs of every kind connected with
the ownership, administration and operation of the Pomeranian Usufruct
until such time as the Required Earning Well and the two additional earning
xxxxx described in Article 4.4 of the Pomeranian Usufruct have been drilled
and completed or abandoned. After the Required Earning Well and the two
additional earning xxxxx described in Article 4.4 of the Pomeranian
Usufruct have been drilled and completed or abandoned, FXEN shall pay its
Participation Interest share of all costs of ownership, administration and
operation including drilling and seismic but excluding costs to be paid by
Apache pursuant to Article 2.1 during the First three-year Exploration
Period. To the extent APACHE authorizes or requests FXEN personnel to
assist APACHE in initiating relations and operational interactions in
Poland pursuant to an agreed budget, the cost will be borne by the joint
account.
2.5 To the extent POGC pays for any of the items described in Article 2.1
through 2.4 above, APACHE's costs will be reduced by an equal amount.
2.6 APACHE shall pay the amounts required under paragraphs 2.1 through 2.4 in
an appropriate and timely manner.
2.7 If impenetrable strata or other cause prevents drilling the Required
Earning Well to required depth, a substitute well may be drilled by an
appropriately extended deadline. If any other event or circumstance beyond
the control of APACHE should cause a delay, then the time for performance
shall be appropriately extended.
2.8 At any time after the Required Earning Well has been drilled, tested and
completed or abandoned APACHE shall have the right to elect not to
participate further in the Pomeranian usufruct. In such case, upon written
notice to FXEN, APACHE shall be relieved of any obligation thereafter
arising pursuant to Article 2.1, 2.3(b) or 2.4. The parties shall enter
into such documents of transfer as may be necessary or appropriate to
transfer to FXEN all of APACHE's right, title and interest in and to the
Pomeranian Usufruct.
ARTICLE 3. CONDUCT AND CONTROL OF OPERATIONS
3.1 Subject to full performance and a timely election by APACHE, the parties
intend for APACHE to have ultimate responsibility for the conduct and
control of operations through management and control of the Polish
commercial partnership which holds the Pomeranian Usufruct. To this end,
the parties will promptly prepare amendments to the existing Partnership
Agreement, and prepare Joint Operating Agreements and Accounting Procedures
(collectively with this Agreement, the "Operating Documents"). In the event
the anticipated structure or parties are changed, the Operating Documents
shall be changed accordingly.
3.2 The Operating Documents shall be deemed to apply to all operations carried
out hereunder, including the Required Earning Well and the seismic
acquisition referred to in Article 2. FXEN and APACHE shall comply with the
requirements of the Operating Documents in the conduct of such operations,
except as specifically superseded by the terms of this Agreement. FXEN and
APACHE shall cooperate fully so as to enable APACHE's personnel to manage
the conduct and control of operations.
3.3 The Operating Documents shall contain provisions that are considered usual
or standard in the industry in operations of this kind; provided, that the
following specific substantive provisions (or functional equivalent) shall
be contained in the Operating Documents:
(a) Neither APACHE nor FXEN will charge the joint account for home office
general or administrative expenses, nor will they or the operator
charge the joint account a "drilling well rate," "producing well rate"
or "construction rate" or similar charge in lieu of overhead, but each
may charge the joint account for technical personnel while engaged in
operations; general or administrative expenses incurred in Poland
shall be properly allocated among projects and charged to the joint
account.
(b) The parties agree to cooperate in sharing information and finding the
best methods to market production of oil or gas.
(c) Each party to the Operating Documents, in proportion to its interest
therein, shall have the right (but not the obligation) to participate
on a "ground floor" basis in the construction, operation, and
ownership of any gathering line or processing facility proposed by any
other party thereto to be used in connection with production from
lands subject to the Operating Documents.
(d) FXEN and APACHE shall have the right of access at all reasonable times
and at their respective sole risk and expense to the seismic and other
operations and to the location of the Required Earning Well and/or the
drilling operations provided they give reasonable notice of the date
such access is required and identify the representatives to whom such
access is to be granted.
(e) The Operating Documents shall provide for prior AFE approval of all
operations or construction anticipated to cost more than $200,000 and
shall provide for prepayment or "cash calls" at the request of the
operator.
(f) The Operating Documents shall not contain a "challenge of operator"
provision, but shall provide for change, replacement or resignation of
operator (or of the party in control of the operator) only in the
usual circumstances (e.g., bankruptcy, failure to comply with Usufruct
terms, reduction of interest below 15%, etc.).
(g) The "sole risk" or "non-consent" penalty contained in the Operating
Documents shall provide a 400% penalty in connection with development
xxxxx and a complete loss of interest in the productive reservoir in
connection with nondevelopment xxxxx. In any Pomeranian Usufruct Area
Block not drilled during the First 3-year Exploration Period, the
non-consent penalty for the first well drilled in such Exploration
Block during the Second 3-year Exploration Period shall be complete
loss of interest in the Exploration Block in question, unless each
party elects to drill its own sole risk well. There shall be a limit
of four sole risk development xxxxx per year and two sole risk non
development xxxxx per year during the First 3-year Exploration Phase,
and double those numbers in the Second 3-year Exploration Phase.
(h) The Operating Documents shall provide that an operating committee
comprised of representatives of each participating party shall meet
from time to time and shall prepare an annual budget and schedule of
operations. Decisions shall be by majority interest and "deadlocks"
shall be "resolved" by sole risk or NON-CONSENT PROVISIONS.
(i) The Operating Documents shall provide that Polish contractors shall be
utilized preferentially if they are reasonably competitive in terms of
cost, availability, quality of work and speed of operation.
(j) The Operating Documents shall not contain a preferential right to
purchase provision, but shall provide for 60 days' prior notice to
afford an opportunity to make a competitive offer.
(k) The Operating Documents shall provide that, with respect to any
payments required to be made to any agency of the government of the
Republic of Poland or to the Polish Oil and Gas Company ("POGC"), if
evidence of payment has not been received by FXEN seven days prior to
the due date then FXEN shall have the right, but not the obligation,
to make such payment and to receive reimbursement (plus interest at
the Accounting Procedure rate) from the operator or other responsible
party.
ARTICLE 4. PROTECTION ACREAGE
FXEN and APACHE hereby establish an area of mutual interest ("Halo")
consisting of all lands within 5 kilometers of the exterior boundaries of the
ten Hydrocarbon Concession Blocks which are subject to the Pomeranian Usufruct.
The Halo shall expire two years after the effective date of this Agreement
unless extended by mutual agreement. After acquiring acreage within the Halo,
the acquiring party shall within 20 days after execution of a Usufruct or other
agreement for a given parcel of acreage offer the same to non-acquiring party
for the latter's participation on a "ground floor" 50%/50% basis, subject to
proportional reduction if and to the extent of any POGC participation.
ARTICLE 5. INFORMATION AND CONFIDENTIALITY
5.1 All information and data (geophysical, geological, engineering, production
marketing or otherwise) acquired or developed by the parties under this
Agreement in connection with joint operations hereunder shall be kept
confidential by the parties unless the release of such information to a
third party is agreed upon by the parties or until such information or data
otherwise becomes public information other than through breach by any of
the parties of the provisions of this Article. Such confidential data and
information shall not be traded, sold, exchanged or disclosed to others
except:
(a) to an affiliate for its use only, subject to the disclosing party
being responsible for such affiliate maintaining the confidentiality
of the data ant information so disclosed, or
(b) as required by law or by any stock exchange on which the shares of a
party or an affiliate of a party are listed, or
(c) to a bona fide prospective purchaser or assignee, or
(d) to outside professional consultants of a party, provided that such
party shall promptly inform the other parties of the names of such
professional consultants, or
(e) to contractors by the operator if disclosure is necessary in
connection with the conduct of joint operations, or
(f) to financial institutions and investment banks and their consultants
where and to the extent such disclosure is necessary in connection
with financing arrangements.
Disclosures pursuant to (c), (d), (e) and (f), above, shall be made only
under written agreement of the party to whom disclosure is made not to
disclose for the period specified in Article 6.2 except as required by law.
The foregoing obligations shall remain binding on a party and its
affiliates after it ceases to be a party hereto.
5.2 The term during which information and data 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. For purposes of this Article 5 the term "party" shall include an
affiliate of a party.
5.3 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 POGC or from any affiliate, division or unit
thereof.
ARTICLE 6. FURTHER ASSURANCE
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.
ARTICLE 7. ASSIGNMENT
7.1 Each of the parties may assign or transfer the whole or any part of its
interest in accordance with the terms of the usufruct Agreement and the
Operating Documents provided that any assignee or transferee is a
financially responsible party and shall as a condition to such assignment
agree in writing to become a party to the Operating Documents and fulfill
the obligations of the assignor under this Agreement to the extent that
they are not fulfilled by assignor.
7.2 Neither party hereto shall sell or transfer its interest herein (other than
to a close affiliate or POGC) without first giving the other party hereto
60 days' prior notice of proposed sale in order to afford an opportunity to
make a competitive offer. No sale or other transfer (other than to a close
affiliate) shall convey a right to control operations or a right to benefit
from the terms referred to in Article 3.3(a).
7.3 The provisions of this Agreement shall inure to the benefit of and be
binding on the successors and permitted assignees of the parties.
ARTICLE 8. AMENDMENT; PRIOR AGREEMENTS
This Agreement may only be altered, varied or amended by written instrument
executed by all the parties. This agreement supercedes all prior agreements
between FXEN and Apache relating to the Pomeranian usufruct.
ARTICLE 9. RELATIONSHIP
9.1 The parties intend will operate as required through a Polish commercial
partnership to carry out the activities contemplated herein, but nothing in
this Agreement shall be construed as creating any other partnership of any
kind, or association, or trust, or as imposing upon any party any duty,
obligation or liability of a partnership nature and each party shall be
individually and severally responsible hereunder only for its obligations
as set out in this Agreement.
9.2 Those parties subject to the taxing jurisdiction of the United States of
America agree to elect, under Section 761 (a) of the Internal Revenue Code
of 1986, as amended (the "Code"), to be excluded from all of the provisions
of Subchapter K of Chapter 1, Subtitle A of the Code.
9.3 Notwithstanding anything to the contrary contained in this Agreement, a
party not subject to the income tax laws of the United States of America
shall not be required to do or execute anything which might subject it or
its income to any United States of America tax and nothing contained in
this Agreement shall constitute or shall be construed as constituting a
submission by any party to the taxation jurisdiction of the United State of
America.
ARTICLE 10. 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).
Xxxxx Xxxxxx, CEO Xxxxx X. Xxxxx, President
FX Energy, Inc. APACHE Overseas, Inc.
0000 Xxxxxxxx Xxxxx, Xxxxx 000 0000 Xxxx Xxx Xxxxxxxxx
Xxxx Xxxx Xxxx, XX 00000 Xxxxxxx, XX 00000-0000
Telephone: 0-000-000-0000 Telephone: 0-000-000-0000
Fax: 0-000-000-0000 Fax: 0-000-000-0000
ARTICLE 11. TERMINATION
In the event of termination of this Agreement for any reason, such
termination shall be without prejudice to any rights, liabilities and
obligations accrued or outstanding at the date of termination or otherwise
arising in respect of operations carried out prior to such termination.
ARTICLE 12. GOVERNING LAW; ARBITRATION
12.1 The laws of Texas shall govern the validity, construction, interpretation,
and effect of this Agreement, excluding any choice of law rules which would
otherwise require the application of laws of any other jurisdiction.
12.2 Any dispute arising in connection with this Agreement shall be exclusively
and finally settled by arbitration in Houston in accordance with the Rules
of the American Arbitration Association, which shall be the appointing
authority in case of need.
The arbitration panel shall render its decisions in writing, and such written
decisions and conclusions with respect to the disputes so settled shall be final
and binding on the parties to the arbitration proceeding, and confirmation and
enforcement of the awards so rendered may be obtained and entered in any court
having jurisdiction thereof.
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.
Signed this 27 day of February, 1998 Signed this 27 day of February, 1998
FX Energy, Inc. Apache Overseas, Inc.
/s/ Xxxxx X. Xxxxxx /s/ Xxxxx X. Xxxxx
