FX Energy - Project Areas

The Rotliegend in Poland Regional Setting

We are focused on the Polish portion of the gas bearing Rotliegend fairway of the Northwest European Permian Basin. This fairway begins in the west in the UK sector of the Southern North Sea ("SNS"), extends through the Netherlands and Germany, and culminates in Poland. Similar aeolian Rotliegend sandstone reservoirs, formed by structural and/or stratigraphic traps, with gas sourced by Carboniferous coals and sealed by Zechstein evaporates, extend across the Basin.

Steady advances in geophysical techniques in these Permian basins have led to the discovery and development of over 200 trillion cubic feet (Tcf) of gas in the Rotliegend of the SNS Gas Basin and the Dutch onshore. In contrast, only 5 Tcf of gas has been discovered by POGC to date in the Rotliegend in Poland since the mid-sixties, mostly in shallow plays to the south of the Wolsztyn High. Between 1976 and 1985 however, 500 bcf of gas reserves was discovered by POGC in a deeper Rotliegend play, to the north of the Wolsztyn High. This Radlin trend bisects our Fences concession. There was little or no activity targeted towards the Rotliegend by POGC since these discoveries in the early eighties. During the past dozen years POGC’s attention has focused on the Main Dolomite and Basal Limestone plays in the Zechstein.

We have concluded that there are likely to be substantial additional gas reserves in the Rotliegend (and in the Main Dolomite and Basal Limestone) that can be identified through the application of geophysical techniques that have not previously been applied in this area in Poland.

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Exploration History

While many wells have been drilled "Soviet-style" in the region, effective exploration drilling density is relatively low at the Rotliegend horizon. The quality of seismic data in this area has been poor until recently. Furthermore, interpretation is subject to the well-known complexities affecting the Rotliegend throughout the Northwest European Permian Basin. Interpretation lessons from the SNS were generally not applied. It is only in the last few years, with the entry of western companies, the computer enhancement of vintage seismic and the acquisition of good quality new seismic data, that the substantial additional exploration potential within the Rotliegend in Western Poland has been recognized.

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Geological Setting

The Rotliegend sandstone, our main target reservoir, is present throughout the Fences and Northwest concession project areas at depths of between approximately 2,500 to 4,000 meters (approximately 1,200 to 1,500 meters in Block 287). The Rotliegend dips gently towards the northeast, into the Foresudetic Monocline. To the southwest, the Rotliegend pinches out up dip onto the Wolsztyn High, with stratigraphic play potential.

Reservoir quality deteriorates somewhat as depth of burial increases. However, a down dip well at a depth of 3,750 meters, and our own commercial successes at Zaniemysl 3 (2,850 meters), Sroda 4 (3,600 meters), Winna Gora (3,550 meters), Roszkow (3,000 meters), Kromolice-1 (3,500 meters) and Kromolice-2 (3,550 meters) support good reservoir characteristics over virtually the entire Fences area. The top Rotliegend horizon is quite heavily faulted, most frequently by normal faults. The dominant trend of these faults is northwest to southeast, with most tending to downthrow to the northeast. However, a number of potential traps, and the Radlin field itself, are set up by down thrown faults against the regional dip.

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Rotliegend Reservoir Presence and Quality

In the Upper Rotliegend, desert sandstones, mainly aeolian with minor fluvial and sabkha deposits, are the dominant facies in the Fences areas. The Fences concession area is favorably located for aeolian facies sands with good porosity and permeability characteristics. Some of the best reservoir rock is found in the Fences area as the Rotliegend climbs up the Foresudetic Monocline around the Radlin field.

Reservoir quality in many wells in the area is extremely good in the top 40-65 meters of the Rotliegend, which is usually predominantly clean aeolian dune facies. Volumetrically, this interval would form at least 90% of the expected closure in all but the very biggest anticipated structural cases.

Based on offset well data and regional models, porosities in this upper interval generally range between 14% and 20%. Permeabilities are harder to predict and more variable, as they are dramatically affected by grain-size, which varies independently of facies and porosity. Nevertheless, core permeabilities show an average of 25 mD, generally within a range of 10 mD to 100 mD, with individual layers from less than 1 mD to several Darcies. Average permeabilities from well tests in the Radlin field are 185 mD.

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The Zechstein in Poland

The Zechstein has two proven productive carbonate horizons in Poland’s Permian Basin: the Basal Limestone or Ca1 and the Main Dolomite or Ca2. The Ca1 is gas productive and has been the target of extensive exploration since the early 1980’s. The Ca2 has more recently been proved to be oil as well as gas bearing in subtle stratigraphic plays apparent on 3-D seismic.

Based on this 3-D work, two significant oil prone stratigraphic plays have been recognized in the Ca2 in lowstand fan features down slope from structural highs. The potential of these plays is illustrated by two POGC discoveries: the BMB field discovered in 1993 with a reported 90 million barrels of oil plus 350 bcf of gas and the Lubiatow-Miedychod-Grotow (LMG) complex with a reported 38 million barrels of oil plus 160 bcf of gas. These two fields together have recoverable oil and gas reserves reportedly in excess of a TCF equivalent. These main Dolomite or (Ca2) fields are located in Western Poland.

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Project Areas

As of December 31, 2008, we held gas and oil exploration rights in Poland in nine separately designated project areas encompassing approximately 5.4 million gross acres. We are currently the operator in all areas except our core area, the 852,000 gross acres Fences project area in which we hold a 49% working interest and in which POGC is the operator. We own a 100% working interest in approximately 4.3 million gross acres. Of the remaining approximately 1.1 million gross acres, we hold approximately 0.6 million net 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: Fences, Block 255, Block 287, Northwest, Kutno, Warsaw South, Edge, Block 229, and Block 246. 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 have made five commercial gas discoveries, together with POGC, containing proved gas reserves of over 100 Bcf gross (43 Bcf net to our interest), 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 255 and expect to be selling gas in the second quarter 2009 from a well in Block 287. We are developing longer-term exploration prospects in the remaining six areas.

Fences Area

The Fences concession area is 852,000 gross acres (3,450 sq. km.) in western Poland's Permian Basin surrounding POGC's Radlin gas field. The Radlin field and several other POGC gas fields located in the Fences area are "fenced off" or excluded from our exploration acreage. These fields, discovered by POGC between 1974 and 1982, produce from structural traps in the Rotliegend sandstone. We hold a 49% interest in approximately 807,000 acres and a 24.5% interest in the remaining 45,000 acres in the Fences area.

The Rotliegend is the primary target horizon throughout most of the Fences concession area, at depths from approximately 2,500 to 4,000 meters. There are two types of Rotliegend traps in the region: structural traps and stratigraphic ("pinch-out") traps. Both of these trap types are known to produce gas in the region. In addition, we have identified what appear to be carbonates in the Zechstein, a third type of trap that is known to produce both gas and oil in the region.

Fences Area: Structural Traps

Based on our drilling experience since 2000 in the Fences area, we have emphasized the use of seismic acquisition, processing, and interpretation techniques that have been used successfully in the Rotliegend gas fields of the United Kingdom's offshore Southern Gas Basin. With Rotliegend structures as our target, and utilizing improved seismic data processing and acquisition techniques, we have drilled seven wells targeting Rotliegend structures from 2004 through the end of 2008. Five of these wells are commercial, with aggregate proved gas reserves of over 100 Bcf gross (43 Bcf net to our interest). On a P-50 basis these wells are evaluated as most likely to produce 183 Bcf (79 Bcf net to our interest).

As part of our focus on that part of the Fences area that is prone to Rotliegend structural traps, we have acquired several hundred square kilometers of 3-D seismic data in the area where the Kromolice-1 and -2, Sroda-4, and -5, and Winna Gora wells are located and along the trend to the southwest. We also acquired approximately 167 kilometers of two-dimensional, or 2-D, seismic data over a lead, Taczanow, that lies on the trend southeast from the Zaniemysl and Roszkow wells, our two biggest discoveries to date. Final interpretation of this seismic data is due in 2009.

Finally, in the northernmost part of our Fences concession and lying within the area covered by our recent 3-D seismic data, we have identified a very large upthrown block, or horst, of Rotliegend sandstone that encompasses approximately 50 square kilometers, or 12,000 acres, within our Fences concession and continues into the area north of our concession. One well, the 1984 Plawce-1, was drilled by POGC on this Rotliegend block within what is now our Fences concession. Five other wells have been drilled by others (4 of these more than 20 years ago) in this horst block north of our concession boundary. All six of these wells had substantial gas columns, and all but the most recent well were plugged due to relatively tight reservoir rocks. The one new well, Trzek-1, located about six kilometers north of our concession, was drilled in 2007 and reportedly tested gas at rates between 2.5 and 7.5 million cubic feet of natural gas per day, or MMcfD, after high-pressure hydraulic fracturing.

We are continuing to evaluate our data and are working with POGC on a plan to appraise and explore the gas resource in the Plawce area. We acquired 45 square kilometers of 3-D seismic data in 2008 that will enhance the quality of our existing 3-D seismic data in the Plawce area, once the data is interpreted during 2009.

Fences Area: Stratigraphic Traps

In the southwestern portion of the Fences concession there is potential for stratigraphic trapping, or pinch-outs, in the Rotliegend. Based on data from the Rusocin-1 and the Lugi-1 wells we drilled in 2005, and on the presence of wells that produce from stratigraphic traps further to the west from our concession, we believe it is necessary to acquire 3-D data that will help us determine the next steps in exploring the pinch-out area. It is unlikely that we will pursue this play during 2009, because we are focusing our resources on the structural traps.

Fences Area: Carbonate (Reef) Traps

In the northeastern portion of the Fences concession we have identified carbonate (reef) targets in the Zechstein (Ca2) horizon of the lower Permian, just above the Rotliegend. In February 2008, we began drilling the Grundy-1 well to test a possible Ca2 reef build-up identified on 2-D seismic. Although the Grundy-1 well did not establish commercial reserves in the Zechstein, it did provide confirmation of a Ca2 reef buildup. The Grundy-1 is located approximately 30 kilometers east of our Sroda area. The nearest significant Ca2 producing fields, the BMB and Lubiatow-Miedzychod-Grotow (LMG) gas and oil fields owned by POGC, are located approximately 150 kilometers northwest of the Grundy well and reportedly contain approximately 125 million barrels of oil and 500 Bcf of gas recoverable.

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Block 255 Concession Area

The Block 255/Wilga concession area in east central Poland consists of an 82% working interest in approximately 236,000 acres (957 sq. miles). We operated one producing well, Wilga-2. Production from the Wilga-2 well began in September 2006 and continued until the third quarter 2009 when, despite repeated workover attempts, production from the Wilga well ceased. We have impaired the remaining capitalized costs at Wilga and are planning to dismantle the production facility.

Block 287 Concession Area

The Block 287 concession area is 213,000 acres (863 sq. km.) located approximately 25 miles south of the Fences concession area. We own 100% of the exploration rights. Block 287 was part of a larger concession area that we relinquished in 2007 based on our technical evaluation and on a dry hole that we drilled in 2006.

Within Block 287 there are three Rotliegend gas wells known as the Grabowka wells. Originally drilled by POGC in 1983-85, these three wells tested gas but never produced commercially. In early 2007, we entered into a joint venture agreement with an unrelated party, PL Energia S.A., headquartered in Krzywoploty, Poland, under which all costs of re-entering and completing the three Grabowka wells and building production facilities are paid by our joint venture partner in exchange for discounted pricing on gas.

In June 2008, we successfully re-entered the first well, Grabowka-12. Facilities were completed and production started from the Grabowka-12 well in July 2009. The well is producing at a rate of between 740,000 and 925,000 cubic feet of gas per day. Net revenue to FX Energy from the Grabowka-12 well is expected to generate approximately $500,000 per year over the next several years. Two other wells, Grabowka-6 and 8 are expected to be worked over and begin production at a later date.

Northwest Concession Area

In 2006, the Company acquired 100% interest in a concession in west-central Poland covering 1.6 million acres. The concession is in Poland's Permian Basin directly north of POGC's BMB and LMG gas and oil fields. As in our Fences concession, the Northwest concession has three separate possible exploration models: Rotliegend sands trapping gas in structural closures; Rotliegend sands trapping gas in stratigraphic traps or pinchouts; and Zechstein Ca2 dolomitic sands, reefs, and talus trapping oil and gas.

During 2007 we reviewed the existing sparse, 20 year old geological and geophysical data from the area. In an area of 1.6 million acres, there were only about 2,500 kilometers of 2-D seismic data and only three wells drilled to target depths. As a result of this review, we elected to relinquish approximately 500,000 acres from the northeast corner of this concession, retaining 1.1 million acres. During 2008, we acquired portions of two additional blocks, increasing our acreage to 1.36 million acres. We also acquired 245 kilometers of new 2-D seismic data over several of the leads we had identified previously.

In March 2009 we entered into a Joint Operating Agreement (JOA) with the Polish Oil and Gas Company which covers our concession blocks 163-164. These two blocks cover approximately 212,000 acres or approximately 15.5% of our 1.36 million acre concession. In May 2009 we began drilling the Ostrowiec-1 well on the JOA acreage block to test a Ca-2 target and a potential secondary target in the Rotliegend. In August 2009 we plugged and abandoned the Ostrowiec-1 well after encountering extremely high pressure non-flammable nitrogen gas with 4.6% hydrogen sulfide content. Drilling did not reach the secondary Rotliegend target. The cost of drilling the well was paid by POGC in order to earn a 49% interest.

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Kutno Concession Area

In 2007, we acquired a 100% interest in a concession in central Poland covering 284,000 acres; in 2008, we added additional blocks bringing the total to 706,000 acres (2,856 sq. km.). The area encompasses a Rotliegend mega-structure ("Kutno") with projected four-way dip closure. Depth of the structure is estimated at approximately 6,000 meters (19,200 feet). Drilling a test well at Kutno would be a very expensive and high risk effort. However, given the mapped size of the structure, 35,000 acres, it is possible the structure could contain as much as 19 Tcf of gas. In view of the depth and cost, we are seeking industry participation to drill Kutno.

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Warsaw South Concession Area

In 2007, we acquired a 100% interest in several concession blocks in east central Poland; in 2008, we dropped two of the blocks, leaving a total of 638,000 acres (2,581 sq. km.). The Warsaw South concession has several possible exploration opportunities, including carboniferous sands with structural or truncation trapping and Zechstein reefs trapped by overlying evaporates and salt. Our technical group has reviewed the geological and geophysical data from the area and identified a dozen carboniferous leads and two possible Zechstein reef targets. We are seeking industry participation while continuing to carry out early-stage exploration work on our own.

Edge Concession Area

In 2008, we acquired a 100% interest in four concessions in north central Poland covering approximately 881,000 acres (3,567 sq. km.). Having reprocessed existing 2-D seismic data, we identified a number of leads including several Permian age Ca2 reefs and a large Devonian structure. We are soliciting industry support to shoot additional seismic and drill two or more exploratory wells to confirm the plays.

Block 246 Concession Area

In 2008, we acquired a 100% interest in a concession in west central Poland covering approximately 241,000 acres (975 sq. km.). Block 246 is contiguous with the southwest corner of the Fences concession and appears to have Rotliegend potential. We are reprocessing existing 2-D seismic data to identify possible leads.

Block 229 Concession Area

In 2008, we acquired a 100% interest in a concession east of our Fences project area covering approximately 233,000 acres (941 sq. km.). We have identified a number of possible Ca2 reef build-ups on 2-D seismic in Block 229. We plan to seek industry participation while continuing to carry out early-stage exploration work on our own.

Additional Concession Acreage

We may apply for more concession blocks in Poland in 2009. We will allocate modest technical and financial resources to these areas during 2009, primarily in the form of data collection and seismic reprocessing, with a view to ascertaining relative hydrocarbon potential and exploration risk.

Activities and Assets in the United States

Nevada

During 2008, we drilled one shallow dry hole in Nevada. We may drill one well in 2009 on land that is near our existing producing properties.

Montana

During 2008, we drilled two shallow exploratory wells using our own drilling rig. Both wells were plugged and abandoned. We have no plans for further drilling in Montana during 2009.

Oil and Gas Terms

The following terms have the indicated meaning when used in this report:

"Appraisal well" means a well drilled following a successful exploratory well used to determine the physical extent, reserves and likely production rate of a field.

"Bbl" means oilfield barrel.

"Bcf" means billion cubic feet of natural gas.

"Bcfe" means billion cubic feet of natural gas equivalent using a ratio of one barrel of oil to 6,000 cubic feet of natural gas.

"Ca1 and Ca2" refers to specific geological formations.

"Development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

"Exploratory well" means a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir.

"Field" means an area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic conditions.

"Gross" acres and "gross" wells mean the total number of acres or wells, as the case may be, in which an interest is owned, either directly or through a subsidiary or other Polish enterprise in which we have an interest.

"Horizon" means an underground geological formation that is the portion of the larger formation that has sufficient porosity and permeability to constitute a reservoir.

"LCO" means light crude oil.

"MBbls" means thousand oilfield barrels.

"Mcf"means thousand cubic feet of natural gas.

"Mcfe"means thousand cubic feet of natural gas equivalent using a ratio of one barrel of oil to 6,000 cubic feet of natural gas.

"MMcf" means million cubic feet of natural gas.

"MMcfD" means million cubic feet of natural gas per day.

"Net" means, when referring to wells or acres, the fractional ownership working interests held by us, either directly or through a subsidiary or other Polish enterprise in which we have an interest, multiplied by the gross wells or acres.

"Proved reserves" means the estimated quantities of crude oil, gas and gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. “Proved reserves” may be developed or undeveloped.

"PV-10 Value" means the estimated future net revenue to be generated from the production of proved reserves discounted to present value using an annual discount rate of 10.0%, the Standardized Measure of Future Net Cash Flows ("SMOG"). These amounts are calculated net of estimated production costs, future development costs and future income taxes, using prices and costs in effect as of a certain date, without escalation and without giving effect to non property-related expenses, such general and administrative costs, debt service, and depreciation, depletion and amortization.

"Reservoir" means a porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and that is distinct and separate from other reservoirs.

"Tcf"means trillion cubic feet of natrual gas.

"Tcfe"means trillion cubic feet of natural gas equivalent using a ratio of one barrel of oil to 6,000 cubic feet of natural gas.

"Usufruct"means the Polish equivalent of a U.S. oil and gas lease.