AGREEMENT NO......../K/Z/2012 For the Sale of Gas between FX Energy Poland Sp. z o.o. and POLSKIE GRNICTWO NAFTOWE I GAZOWNICTWO S.A.

1.

In this Agreement, the below terms shall have the following meanings:

 

1/

Business Days – days from Monday to Friday, excluding statutory holidays in the Republic of Poland;

 

2/

Contract Day - a period starting at 10:00 p.m. of any given calendar day and ending at 10:00 p.m. of the following calendar day; upon a change of the rules concerning the Contract Day the Parties shall enter into negotiations aimed at updating the definition;

 

3/

Sale Commencement Day - the Contract Day on which the sale of the Gas in Delivery Point commences;

 

4/

Sale Closure Day – the Contract Day on which the production from the Field is ceased, or the Seller loses its title to the Gas, or on which the Purchaser ceases to purchase Gas in connection with the end of the termination notice period pursuant to the Agreement;

 

5/

Gas – the 49% share in the ownership of a mix of hydrocarbons and non-flammable gaseous components including methane and nitrogen as main components, belonging to the Seller, which is not a gaseous fuel according to the Energy Law, and which conforms to the parameters specified in Appendix No. 1 (Quality Specification), produced from the Field on the basis of the Joint Operating Agreement, other than the part of the mineral used in for the purposes of operation of the mining plant;

 

6/

Contract Month - a period starting at 10:00 p.m. of the last day of the calendar month directly preceding the given calendar month, and ending at 10:00 p.m. of the last day of the given calendar month; upon a change of the rules concerning  the Contract Month the Parties shall enter into negotiations aimed at updating the definition;

 

7/

Normal Cubic Meter (Nm3) - means the amount of gas required to fill a space of one cubic metre with an absolute pressure of 101.325 kPa (one hundred and one point three two five kilopascals) and at thermodynamic temperature of 273.15 K (two hundred and seventy three point one five Kelvin); unless expressly stated otherwise, all quantities of the Gas referred to herein shall be expressed in Nm3; upon a change of settlement unit from the Nm3 to kWh energy units the Parties shall enter into negotiations aimed at updating the definition;

 

8/

Sale Period - the period commencing on the Sale Commencement Day and ending on the Sale Closure Day;

 

9/

Planned Maintenance Work - renovation, construction, maintenance and modernization work:

 

(a)

conducted by the Purchaser in the Purchaser’s installations, which affects the Purchaser’s ability to take the Gas at the Delivery Point; the Purchaser’s installations include installations behind the Delivery Point that are at the disposal of the operator of the transmission grid and distribution grid;

 

(b)

conducted by the Seller or by the Purchaser in the Delivery System, which affects the Seller’s ability to sell the Gas at the Delivery Point, including, without limitation, any periodic tests conducted on the Field;

 

10/

Annual Statement– is defined in Appendix No. 2 Technical conditions of Gas delivery;

 

11/

Monthly Statement– is defined in Appendix No. 2 Technical conditions of Gas delivery;

 

12/

Energy Law – an act dated 10 April 1997 – Energy law (unified text: Journal of Laws of 2006 No. 89, item 625);

 

13/

Delivery Point - the point agreed between the Purchaser and the Seller, i.e. the valve (no. GB809 – pursuant to the detailed design of the metering system forming part of Appendix No. 2) installed at the outlet of the Metering System, linking the Delivery System with the Off-take System, constituting the Gas surrender point;

 

14/

Contract Year - a period starting at 10:00 p.m. on the last day of any calendar year and ending at 10:00 p.m. of the last day of the following calendar year, provided that:

 

(a)

the first Contract Year shall commence at 10:00 p.m. on the Sale Commencement Day and shall continue until 10:00 p.m. on last day of the same calendar year;

 

(b)

if this Agreement terminates on any day other than December 31, the last Contract Year shall end at 10:00 p.m. on the last day of effectiveness of the Agreement.

 

15/

Quality Specification – the Gas pressure and a set of physical and chemical parameters of the Gas specified in Appendix No. 1;

 

16/

Gas Station - a set of installations used, whether jointly or separately, to reduce, process, control, measure and distribute the Gas;

 

17/

Delivery System - installations used for the purposes of producing, processing, compressing, testing, measuring and selling the Gas at the Delivery Point;

 

18/

Off-take System – a gas pipeline grid along with appertaining installations, linked with one another and working together, owned by the Purchaser and used to off-take and transport Gas from the Delivery Point;

 

19/

Operator – a party to this agreement appointed to perform the duties specified in the Joint Operating Agreement; at the date of execution of this Agreement the Operator is PGNiG S.A.;

 

20/

Tariff – the set of prices and fee rates, and conditions of their application, prepared by the Seller and introduced as binding for customers specified therein, according to the procedures set forth in the Energy Law; in particular the Tariff shall set out the prices and fee rates for the consumers of the Lw-1 class low-methane gas;

 

21/

Metering System - gas meters and other metering devices, as well as the systems connecting those devices, described in Appendix No. 1, used to measure the quantity of the Gas sold at the Delivery Point, owned by the Seller and the Purchaser;

 

22/

Joint Operating Agreement – Joint operating agreement covering the Poznań area, entered into on 1 June 2004 between the Purchaser and the Seller, on the basis of which both parties will have the ownership title to the Gas in the following proportions (shares) – the Seller – 49% and the Purchaser 51%;

 

23/

Field - means the gas field located in the “Winna Góra” mining area – the natural gas accumulation in the Rotligend sandstone, located in the area of Wielkopolskie province, Września district, in Miłosław municipality, and Środa district, in Krzykosy municipality;

2.

All units of measurement used herein are units of the SI system in accordance with the Law on Measurements dated 11 May 2001 (consolidated text: Dz. U. of 2004, No. 243, item 2441).

1.

This Agreement is entered into as of the date of its execution, for an indefinite period, and shall end in accordance with § 7.

2.

The Sale Commencement Day will be agreed by the Parties on the Contract Day on which the Purchaser as the Operator commences the production of Gas from the Field pursuant to the Joint Operating Agreement.

3.

The settlement of accounts between the Parties in relation to this Agreement shall take place no later than three (3) months after the end of the Sale Period. The Parties are obliged to make final settlements within this time limit.

1.

The Seller undertakes to transfer the ownership title to the Gas to the Seller during the Sale Period and to surrender all the Gas to the Purchaser at the Delivery Point, and the Purchaser undertakes to take all the Gas meeting the quality parameters specified in Appendix No. 1 (Quality Specification) and pay for it at the Gas Price specified in the Agreement.

2.

This Agreement is entered into subject to the fulfilment of a condition precedent whereby the Seller and the Purchaser are to obtain all necessary permits and administrative approvals required to commence the exploitation of the Field and to duly perform the Agreement, including in particular:

 

- a concession to be granted to PGNiG to produce natural gas from the Winna Góra field;

 

- a final building permit for the construction of the Winna Góra Production Centre and the DN 150 pipeline, with an approximate length of 12 800 metres;

 

- an operating permit for the Winna Góra Production Centre, along with the fulfilment of all other conditions enabling production;

 

- the legal title, to be obtained by the Seller, to 49% of Gas produced from the Field, in the form of a joint mining usufruct right or mining sub-usufruct right, or in another form whereby the Seller shall own the Gas produced.

3.

The Seller and the Purchaser undertake to co-operate in obtaining the permits and approvals listed in section 2 above.

4.

The Gas pressure and quality are specified in Appendix No. 1 to the Agreement.

5.

The detailed rules for sale of the Gas to the Purchaser, including its technical and quantity parameters, the rules for the Purchaser to place orders for the Gas, the place of handover of the Gas, the rules for measuring the quality and quantity of the Gas, the rules for preparing Monthly and Annual Statements, and the rules for resolving disputes concerning the quantity and quality of the delivered Gas are defined in Appendices No. 1 and 2 hereto.

6.

The Seller represents that upon the fulfilment of the above conditions precedent it will have the exclusive right to the Gas and that Gas is not encumbered with any legal defects or third party rights that would hinder or prevent the performance of this Agreement.

1.

The Purchaser shall pay for the Gas amounts calculated as the product of the Gas sold (expressed in cubic meters) and the Gas Price (PGU).

2.

As long and the Purchaser applies the Tariff, the Gas Price (PGU) shall correspond to 0.86 (zero point eighty six) parts of the price for gaseous fuel specified in the Tariff for the off-takers of low-methane gas (the “Lw-1” sub-group) taking the largest amounts gaseous fuels from the transmission network operated by Operator Gazociagow Przesylowych Gaz-System S.A., in accordance with the following formula:

3.

If the Tariff is changed, the Gas Price shall change as of the first day of the Contract Month immediately following the month in which the change of the Tariff becomes effective.

4.

If the Purchaser ceases to use the Tariff, the Parties shall enter into negotiations aimed at determining the new Gas Price formula within 30 (thirty) day following a notice to the Seller regarding that event.  If the Parties fail to agree upon a new Gas Price formula within 4 (four) months from the commencement of the said negotiations, each Party may terminate the Agreement subject to no less than 6 (six) month notice, effective as of the end of a Contract Year. For the avoidance of doubt, during the period between the day when the Tariff ceases to apply and the day when the Parties agree on a new Gas Price calculation formula, as well as during the period until the effective date of termination of the Agreement, as referred to in the preceding sentence, the Gas Price applicable on the last day of applicability of the Tariff shall apply.

5.

If the calorific value of the Gas sold is different from the calorific value defined in the Tariff for the prices of the “Lw-1” sub-group low-methane gas, the Gas Price shall be adjusted in accordance with the below formula:

 

PGU (c) = PGU (t) * MCV/TCV

 

where:

6.

Numbers used in the calculation of the Gas Price and the resulting PGU values shall be rounded up or down to the fifth (5) decimal place inclusive.  Numbers shall be rounded down if the digit subject to rounding is in the range between 0 and 4 inclusive, and shall be rounded up if the digit subject to rounding is in the range between 5 and 9.

7.

The Gas Price and the other amounts stated herein are net of VAT, excise, and any similar tax or public charges.

 

§ 5

1.

The amounts due for Gas sold shall be paid monthly, on the basis of Monthly Statements.  Invoices shall be issued within seven (7) Business Days of the end of each Contract Month, and sent to the Purchaser. A copy of the invoice will forthwith be sent to the Purchaser by e-mail, on the Contract Day on which the invoice is issued. The amount due will be paid exclusively on the basis of the original of a correctly issued invoice.

2.

The amounts due for Gas sold shall be paid by wire transfer from the Purchaser’s bank account to the Seller’s bank account specified in the invoice, by the 30th calendar day following the end of the Contract Month in which the Gas has been surrendered to the Purchaser.

 

2.1

If an issued invoice has to be corrected, the time limit for payment will be counted from the date of receipt of the correction invoice by the Client. The same rule shall apply in a situation where a relevant statement is not enclosed with the invoice.

3.

The payment of amounts due under the Agreement shall be deemed to have been made on the date of crediting the Seller’s bank account.

4.

Any default in payment obligations hereunder may result in interest being charged at the statutory rate established pursuant to Article 359 of the Polish Civil Code, calculated for each day of the default.

5.

The Parties shall notify each other in writing of any changes to the descriptions or the numbers of their respective bank accounts, and such notice shall specify both the former and the modified account details.  Such changes shall not constitute amendments to this Agreement. A Party which defaults in these obligations shall indemnify the other for all losses resulting from the default.

 

§ 6

1.

Any complaints regarding invoices must be made in writing within ten (10) Business Days of receipt.

2.

If the complaint refers to a manifest error (e.g. a mathematical error), then the Party receiving the invoice shall be authorized to calculate the correct amount and pay such correct amount only, within the time specified in § 5 section 2, provided that it gives the issuing Party, no later than on the date of payment, a written notice explaining its calculation.  The latter Party shall issue a correction invoice, without any delay after agreeing the correct amount with the former.

3.

Complaints disputing an invoice for reasons other than those stated in section 2 above shall not release a Party from the duty to timely pay the amount stated in the invoice constituting the basis for the complaint.

4.

The provisions of § 5 and this paragraph shall apply, mutatis mutandis, to payments against, and complaints concerning, accounting notes.

 

§ 7

 

The Agreement shall terminate:

 

1)

on the Sale Closure Day;

 

2)

on the effective date of termination notice if the Agreement is terminated pursuant to § 8, § 4 section 4 or § 13 section 3.

 

3)

on the day on which the Field is depleted or geological conditions preventing the continuation of the Field exploitation occur.

1.

Either Party’s failure to perform, or inappropriate performance of the material provisions of this Agreement specified in section 2 below shall entitle the other Party to terminate the Agreement subject to at least 30 (thirty) calendar days’ notice..

2.

Material provisions of the Agreement shall be considered non-performed or performed inappropriately, if:

 

1)

a Party obliged fails to pay the other an amount due under the Agreement and the default continues for at least thirty (30) days and is not cured within an additional 14 (fourteen) day period following a written notice calling for payment and specifying the amount due; or

 

2)

the Seller sells any Gas to a third party without the Purchaser’s prior consent;

 

3)

the Purchaser reserves the right to terminate the Agreement if during three (3) consecutive months the Gas does not meet the conditions specified in Appendix No. 1 to the Agreement.

3.

The Party entitled to terminate the Agreement for the reasons specified in section 2 above shall give the other Party a reasoned and properly documented written notice specifying the reasons, and date of termination of the Agreement pursuant to section 1 of this paragraph.

4.

If the Agreement is terminated due to the reasons specified in section 2 point 1) above, the Seller shall be entitled to claim from the Purchaser statutory interest for each day of delay in payment.

5.

If the Agreement is terminated due to the reasons specified in section 2 point 2) above, the Seller shall pay the Purchaser liquidated damages constituting the equivalent of six (6) times the largest net monthly receivables on account of Gas sold in the preceding twelve (12) months.

6.

Each Party reserves the right to claim compensation for damages in excess of the liquidated damages specified above up to the value of the damage that has been actually sustained.

7.

The Parties agree that the failure to take gas of poor quality will not constitute an event of termination of the Agreement.

1.

Neither of the Parties will be liable under the Agreement for a failure to perform its obligations if it proves that:

 

(a)

the failure has been caused by an extraordinary external events beyond its control, referred to hereinafter as Force Majeure,

 

(b)

it could not have, at the time of execution of the Agreement and despite exercising due care, foreseen the occurrence of such an event and its effects affecting the performance of the Agreement,

 

(c)

it could not have, despite exercising due care, avoided or overcome the event or its effects.

2.

The Parties undertake to immediately provide each other with a documented written notice on the occurrence of Force Majeure and to make all efforts aimed at ending or mitigating its effects.

1.

The Parties shall attempt to resolve all disputes arising out of or in connection with this Agreement by direct negotiations.  If the Parties do not resolve the dispute within three (3) months of the delivery of either Party’s invitation to negotiate with the other, the dispute resulting from this Agreement or relating to it shall be resolved by a state court with jurisdiction over the Purchaser’s registered seat.

2.

The existence of any dispute shall not excuse either Party’s performance of its obligations hereunder.

1.

The Seller undertakes, during the term of the Agreement and following its termination or expiry, not to disclose to other persons (third parties) any information (“Confidential Information“) constituting the Purchaser’s confidential business information within the meaning of the Act on Suppressing Unfair Competition (the Act of 16 April 1993 – consolidated text: Journal of Laws of 2003, No. 153, item 1503, Art. 11 section 4) and any other information received from the Purchaser with written reservation of confidentiality in oral or written form or any other physical form, and recorded on any memory carrier, including both originals and photocopies, other copies, facsimiles, notes, bills and other documents relating to the Purchaser’s or its clients’ operations, business plans and other information, unless the information has become public as a result of actions undertaken by a person unrelated to the Seller or its disclosure is required on the basis of a decision of a relevant public authority.

2.

At the Purchaser’s request made at any time, the Seller is obliged to forthwith:

 

(a)

return Confidential Information along with its copies and extracts,

 

(b)

destroy any documents that have been drafted on the basis of Confidential Information or reflect it.

3.

If the provisions of section 1 are violated, the Purchaser will be entitled to terminate the Agreement with immediate effect.

4.

The provisions of this §13 sections 1-3 will apply as appropriate to information provided by the Seller to the Purchaser.

5.

If the confidentiality provisions of this Agreement are violated, the violating Party will pay the harmed Party a contractual penalty in the amount of the largest net monthly (1 month) receivables on account of Gas sold in the preceding twelve (12) months.

1.

Except as otherwise specifically provided, all notices authorized or required by this Agreement between the Parties, shall be in writing, in Polish, and delivered in person or by registered mail or by courier service with confirmed delivery, or by any electronic means of transmitting written communications which provides written confirmation of completed transmission.  Any communications relating to this Agreement shall be deemed delivered only when received by the Party to whom such notice is directed, and the time for that Party to deliver any notice in response to an originating notice shall run from the date the originating notice is received.  All communications shall be delivered to the following addresses of the respective Parties:

Purchaser:

Polskie Gornictwo Naftowe i Gazownictwo S.A.

2.

The Parties undertake to inform each other forthwith of any changes referred to in section 1 above or otherwise they will bear the costs relating to an inappropriate performance of this undertaking.  Any changes concerning the matters referred to in this clause shall not be regarded as amendments to this Agreement.

 

§ 15

1.

Any amendment to the provisions of this Agreement must be in writing or shall otherwise be null and void.

2.

The following appendices constitute an integral part of this Agreement:

 

1)

Appendix No. 1 – Quality Specification

 

2)

Appendix No. 2 - Technical conditions of Gas delivery,

 

3)

Current excerpts from the companies register of the National Court Register regarding both parties to the Agreement, along with Power of Attorney for the authorized signatories.

3.

This Agreement has been executed in two identical copies, one for each of the Parties.

/s/ Zbigniew Tatys

/s/ Marian Lukaszewicz

Dyrektor, Department Pozyskania Gazu

/s/ David Pierce

/s/ Bartosza Motyka-Radlowski

Z-CA Dyrektora Departament Ekonomiczny

1.

The Gas Pressure at the Delivery Point will not be lower than 6.0 MPa and higher than 7.0 MPa.

2.

The Gas delivered under the Agreement will be compliant with the Quality Specification set forth in the table below.

Parameter

Wobbe index

Heat of combustion (gross calorific value)

Calorific value

Mercury vapour contents

Hydrogen sulfide contents

Total sulphur contents

Contents of ash with particle diameter greater than 5μm

Water dew point at pressure equal to 5.5 MPa in the period from 1 IV to 30 X

Water dew point at pressure equal to 5.5 MPa in the period from 1 XI to 31 III

Dew point of hydrocarbons

Contents of hydrocarbons that may be condensed at - 5oC at the pressure existing in the gas pipeline