PARTICIPATION AGREEMENT
Dated Effective as of February 27, 1998
Between
APACHE OVERSEAS, INC.
and
FX ENERGY, INC.
Pertaining to the Western Carpathian Concession
PARTICIPATION AGREEMENT
This Participation 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 or the applicant
for certain rights to explore for and exploit natural gas and oil (the
"Hydrocarbon Rights") in certain lands in the western Carpathian area of
the Republic of Poland pursuant to mining usufruct agreements.
B. APACHE wishes to acquire an undivided beneficial interest in the
Hydrocarbon Rights and FXEN is willing to transfer such interest 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 applicable Polish
commercial partnership which currently holds or has applied for the
usufructs.
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(s)" shall have the meaning given in Article 2.3.
"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."New Usufruct Area" refers to lands covered by the New Usufruct in one
or more of the following eighteen Hydrocarbon Concession Blocks: nos. 388, 389,
390, 391, 392, 393, 394, 39S, 396, 408, 409, 410, 411, 412, 413, 414, 415, and
416.
"New Usufruct" means the mining usufruct agreement being applied for by FX
Energy Poland Sp. z o.o. and Gasex Production Company Sp. z o.o., Commercial
Partnership, with 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 New Usufruct Area.
"Western Carpathian Usufruct Area" refers to lands covered by the Western
Carpathian Usufruct in one or more of the following twelve Hydrocarbon
Concession Blocks: no. 410, 411, 412, 413,414, 415, 430, 431, 432, 433, 452, and
453.
"Western Carpathian Usufruct" means that certain Mining Usufruct Agreement dated
October 14, 1997, between FX Energy Poland Sp. z o.o. and Gasex Production
Company Sp. z o.o., 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
Western Carpathian 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 ofthis 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 Western Carpathian 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, 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 Western Carpathian Usufruct. Apache's full and
timely performance of the obligations set forth in Articles 2 below shall
be a condition subsequent to its ownership of its beneficial interest in
the Western Carpathian Usufruct and if and when issued, the New Usufruct,
provided that nothing herein shall terminate Apache's right to any
discovery made prior to full performance of such condition.
1.5 FXEN and APACHE acknowledge that POGC is expected to hold an option to
acquire or earn an interest in the Western Carpathian Usufruct and the New
Usufruct pursuant to an option agreement with all of the parties thereto
are currently negotiating. 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 each usufruct is referred to herein as such party's
"Participation Interest".
1.6 FXEN will promptly cause the partnership to which the New Usufruct is
issued to promptly transfer to Apache's chosen affiliate a 50% interest in
such partnership and usufruct, when issued. The participation of the
parties in the New Usufruct shall be on a "ground floor" basis.
ARTICLE 2. PARTICIPATION OBLIGATIONS
2.1 Within fifteen (15) days of execution of this Agreement APACHE will pay to
FXEN a one-time fee of $500,000.
2.2 APACHE will pay all amounts referred to in the Western Carpathian 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.
2.3 APACHE hereby commits 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) each of the three xxxxx specified in Articles 4.3 and 4.4 of the
Western Carpathian Usufruct. Such three xxxxx are referred to herein as the
"Required Earning Xxxxx". Each of the Required Earning Xxxxx shall be an
exploratory well and not an appraisal or development well. APACHE will have
the ultimate decision in selecting the drilling location of each Required
Earning Well. Apache shall spud the first Required Earning Well in the
Western Carpathian Usufruct before December 31, 1999, and the remaining two
Required Earning Xxxxx in the Western Carpathian Usufruct before June 30,
2000.
2.4 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 350 km of seismic in the Western Carpathian Usufruct area,
and (b) all seismic acquired or processed in the Western Carpathian
Usufruct Area until such time as the last of the Required Earning Xxxxx
applicable to such Usufruct has been drilled and completed or abandoned,
provided, that FXEN shall pay its Participation Interest share of all
seismic acquisition over and above 500 km.
2.5 APACHE will pay all of the APACHE and FXEN Participation Interest share of
all costs of every kind connected with the ownership, administration and
operation of the Western Carpathian Usufruct until such time as the last of
the Required Earning Xxxxx has been drilled and completed or abandoned.
After the last of the three Required Earning Xxxxx has been drilled and
completed or abandoned, FXEN shall pay its Participation Interest share
of all costs relating to ownership, administration and operation including
drilling and seismic but excluding costs to be paid by Apache pursuant to
Article 2.2 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.
2.6 To the extent POGC pays for any of the items described in Article 2.2
through 2.5 above, APACHE's costs will be reduced by an equal amount.
2.7 APACHE shall pay the amount due under paragraph 2.1 above by wire transfer
to the account of FXEN at Bank One Texas, NA, in Houston, Texas. APACHE
shall pay the amounts required under paragraphs 2.2 through 2.5 in an
appropriate and timely manner.
2.8 If permission to acquire seismic is not granted within 30 days after a
properly completed application is submitted, or if permission to drill a
Required Earning Well is not granted within 60 days after a properly
completed application is submitted, then the requirement herein to spud the
applicable Required Earning Well shall be extended for a number of days
equal to such excess delay. If impenetrable strata or other cause prevents
drilling 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.
2.9 If FXEN and APACHE jointly elect to drill one or more xxxxx (other than
Required Earning Xxxxx) in the general area of the Western Carpathian
Usufruct Area, they shall agree to an appropriate extension of time for
drilling the Required Earning Xxxxx. With reference to that certain
Participation Agreement dated effective as of April 16, 1997, pertaining to
the Lublin area, FXEN and APACHE further agree that one of the three xxxxx
required under Article 2.3 thereof to be spudded before July 1, 1999, may
instead be spudded before December 31, 1999, if APACHE so elects.
ARTICLE 3. CONDUCT AND CONTROL OF OPERATIONS
3.1 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 Western Carpathian Usufruct.
To this end, the parties will promptly prepare amendments to the existing
Partnership Agreement, and prepare a Joint Operating Agreement and
Accounting Procedure (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 Xxxxx 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 Xxxxx 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 non-development xxxxx. In any Western Carpathian
Usufruct Area Block or New 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
area of southwestern Poland bounded on the north by 50. 15' 00"; on the east by
22. 00' 00"; and on the south and west by the border of Poland. 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 and 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 Western Carpathian 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 l, 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
