Company Overview
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Introduction
We are an independent oil and gas exploration and production company with principal production, reserves, and exploration activities in Poland and, modest oil production and oilfield service activities in the United States. We believe Poland is a unique international exploration opportunity. Relatively little gas has been discovered in Poland's sector of the North European Permian Basin, compared to the discoveries in the United Kingdom, Dutch, and German sectors. For most of the twentieth century, Poland was closed to exploration by foreign gas and oil companies. Consequently, we think the Polish Permian Basin is underexplored and underexploited, and therefore has high potential for discovering significant amounts of oil and gas. Acting on this thesis, we have acquired a large land position and we are conducting a focused exploration program. Independent engineers estimated our total proved oil and gas reserves at 50.4 billion cubic feet of natural gas equivalent, or Bcfe, at year-end 2009. The PV-10 Value of these reserves at year-end 2009 was approximately $146 million, which is equal to approximately $3.39 (after tax) per share of stock outstanding at year-end. Our oil and gas reserve volumes in Poland have increased at a compound annual growth rate of 30% since 2003. Our production volume has increased at a compound annual growth rate of 52% from 2005 to 2009. At year-end 2009 we were producing approximately 12.0 million cubic feet of natural gas per day, of MMcfd. We have three additional wells that are expected to add a further 6.9 MMcfd at year-end 2010. These increases are attributable to our exploration success in Poland. With a view to future growth in reserves and production, we now hold 4.74 million gross acres (4.2 million net acres) in Poland and continually review additional acquisition opportunities. References to us in this report include FX Energy, Inc., our subsidiaries, and the entities or enterprises organized under Polish law in which we have an interest and through which we conduct our activities in that country. Our headquarters are in Salt Lake City, Utah, and we have operations offices in Warsaw, Poland, and Oilmont, Montana. Corporate Strategy Our general strategy is to focus our resources on Poland. More specifically, we plan to direct the bulk of our available funds, management and technical resources to our core Fences concession area in Poland. We currently are concentrating our drilling activities in our core area in an effort to lower drilling risk, shorten the time to first production from successful wells, and optimize opportunities for robust revenue growth. At the same time, we do plan to acquire, hold, and explore acreage outside our core area, where we believe we have the opportunity to find significant oil and gas reserves. We currently hold substantial acreage in areas of Poland that we consider underexplored and underdeveloped and, therefore, subject to greater exploration risk than our core area. In order to diversify risk, we plan to allocate a relatively small portion of available funds to carry out preliminary exploration work on this non-core acreage. We plan to rely on industry farmouts for the bulk of early-stage drilling. To the extent our strategy of focusing on our core area continues to result in substantial revenue growth, we plan to cautiously increase our funding of exploration projects over a wider area in Poland.
Current Activities and Assets in Poland Our strategy focuses on Poland because we believe Poland has substantial undiscovered hydrocarbon potential. We think the Polish portion of the Permian Basin is underexplored and underdeveloped today because the country was closed to competition and capital from foreign oil and gas companies for many decades. The continuous advances in exploration technology around the world were not immediately applied in Poland during the period it was behind the "Iron Curtain." We concentrate our exploration efforts in Poland primarily on the Rotliegend sandstones of the Permian Basin. We were attracted to the Rotliegend sandstones in Poland by two observations:
We have identified a core area consisting of approximately 852,000 gross acres surrounding the Radlin Field. This 390 billion cubic feet, or Bcf, Rotliegend gas field was discovered in the 1980s by our joint venture partner, POGC, which owns and produces gas from the field. We have emphasized improved seismic data acquisition and processing in our exploration, using technology developed by others for Rotliegend exploration in the Southern North Sea. From 2004 through 2009, in the course of our Polish exploration with this approach, we have made commercially successful discoveries in seven of the ten wells we have drilled on Rotliegend structural trap targets. In the aggregate, these seven discoveries found gross estimated proved reserves of 120 Bcf of gas. We have acquired three dimensional or 3-D, seismic data over several hundred square kilometers in the Fences concession, and plan to acquire 3-D seismic data over more of the concession. Using this data acquired to date, we have identified a number of possible structural traps. We believe the 3-D seismic data gives us better definition of the targets and might further reduce our drilling risk, but we expect that we will continue to drill wells that do not establish production or reserves. We plan to direct the bulk of our available funds to carry out a multi-year exploration, appraisal, and development drilling program in our core area. These operations focus on the first element of our general strategy - to increase production and reserves in our core area. While maintaining our focus on the Rotliegend structural trap exploration model in our core Fences area, we are also carrying out exploration work on other potential exploration models. These include non-Rotliegend prospects in our core area and various exploration opportunities on our 3.8 million net acres outside our core area. We have accumulated this large land position in known productive regions or geologic trends and in selected "rank wildcat" areas in Poland. We have assembled a sophisticated technical team experienced with using modern exploration tools and generated a number of attractive oil and gas prospects. We are inviting industry participation in the early-stage drilling of these prospects. To the extent our overall strategy results in substantial revenue growth, we plan to direct more of our own funds toward exploration outside our core area. However, we will continue to devote the greatest portion of our efforts and capital resources over the next several years to the Rotliegend structural trap gas prospects in our core. Some of our Polish operations are conducted in partnership with POGC. POGC is a fully integrated oil and gas company, which is largely owned by the Treasury of the Republic of Poland. POGC is Poland's principal domestic oil and gas exploration, production, transportation, and distribution entity. Under our existing agreements, POGC has provided us with access to exploration opportunities, previously collected exploration data, and technical and operational support. We also use geophysical and drilling services provided by POGC and sell our gas production to POGC.
Key Personnel for Poland Jerzy Maciolek is a director of the Company and heads our exploration team as Vice President of International Exploration. He joined the Company in 1995 specifically to lead it into Poland where he had identified the exploration opportunity that today is our core asset. Mr. Maciolek has over 25 years of experience as a geophysicist with POGC, Gulf Oil Research, and as an independent consultant. He received an M.S. in exploration geophysics from the Mining and Metallurgical Academy in Krakow, Poland. Our Country Manager in Poland is Zbigniew Tatys, the former General Director of POGC's Upstream Exploration and Production Division. During his 20-year career with POGC, he rose through the ranks as a production engineer and was serving as Vice Chairman of POGC at the time of his retirement. Mr. Tatys has unique qualifications to lead us through our transition from a pure exploration company to an oil and natural gas producer in Poland. Our chief technical advisor is Richard Hardman, CBE. He also serves on our board of directors. Mr. Hardman has built a career in international exploration over the past 40 years in the upstream oil and gas industry as a geologist in Libya, Kuwait, Colombia and Norway. In the United Kingdom, his career encompasses almost the whole of the exploration history of the North Sea - 1969 to the present. With Amerada Hess from 1983 to 2002 as Exploration Director and later Vice President of Exploration, he was responsible for key Amerada North Sea and international discoveries, including the Valhall, Scott and South Arne fields. Mr. Hardman was made Commander of the British Empire in the New Year Honours, 1998, and has served as the Chairman of the Petroleum Society of Great Britain, President of the Geological Society of London, and President of the European Region of American Association of Petroleum Geologists Europe. Our U.S. Presence Unlike our position in Poland, the US operation does not have substantial exploration potential. It provides a modest amount of cash flow and is not capital intensive. It consists mostly of shallow, oil-producing wells in the Cut Bank Oil Field of Montana. As of December 31, 2009, our U.S. reserves were estimated at 463,000 barrels of crude oil with a PV-10 value of approximately $3.5 million. At year-end 2009, U.S. reserves were approximately 6% of total reserves on a gas equivalent basis. Our oil wells produced approximately 175 barrels of oil per day, net to our interest. From our field office in Montana, we also provide oilfield services, which provided approximately $1.9 million in revenue during 2009. Exploration, Development, and Production Activities Polish Exploration Rights As of December 31, 2009, we held oil and gas exploration rights in Poland in nine separately designated project areas encompassing approximately 4.7 million gross acres. We are currently the operator in all areas except our core area, the 852,000 gross-acre Fences project area, in which we hold a 49% working interest in approximately 807,000 acres and a 24.5% interest in the remaining 45,000 acres. POGC is the operator. We own a 100% working interest in approximately 3.8 million gross acres. As we build revenues in our core area and further explore and evaluate our acreage in Poland, we expect to increasingly focus our operational and financial efforts on areas with larger potential reserves. As we do so, we may add new concessions that we believe have high potential and relinquish acreage that we believe has lower potential. Exploratory Activities in Poland Our ongoing activities in Poland are conducted in nine project areas: Fences, Block 255, Block 287, Northwest, Kutno, Warsaw South, Edge, Block 246 and Block 229. Our drilling activities are currently focused primarily on the core Fences area, where the gas-bearing Rotliegend sandstone reservoir rock is a direct analog to the Southern North Sea gas basin offshore the United Kingdom. We are focused on this core area because substantial gas reserves have already been discovered and developed by POGC, we and POGC have discovered, proved gas reserves of over 120 Bcf gross (53 Bcf net to our interest) in seven commercial wells, and we have concluded that there is likely to be substantial additional natural gas in the same geologic horizon. We are selling gas from wells located in the Fences area and Block 287. We are developing longer-term exploration prospects in the remaining seven areas. Click here.
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