The Makó gas will flow in 2012. Makoian and Siberian will hit it off together.

Interview with Dr. György Szabó, head of Falcon Oil and Gas Hungarian operations.

Tibor Farkas

INGATLANMAGAZINE

2009.08.09. 12:53

When the discovery of Makó’s giant gas field was first announced, the news whipped up a feverish excitement across the country. However, it is less known that the resource is unconventional, the hydrocarbon practically locked up inside the rocks, and the technology for extraction is couple of years away. The Hungarian government have not risked a dime on this project; however in the meantime, Falcon Oil & Gas and partners invested 500 million dollars into the project. When there will be gas, and how the gas will be brought to the surface, and how this will influence the European Union’s gas supply – we asked Dr. György Szabó, head of the Falcon-TXM operations in Hungary.

- Where does the Makó project stands now? Since this resource we’re talking about is an unconventional resources and it does creates difficulties in the preparation for exploitation.

-Already, back in the 1970’s experments were conducted in Hungary and in the United States as well in the unconventional field; however back then we used to called it ‘tapping the low permeable gas saturated rocks’. At that time, the United States tried to unlock these rocks with nuclear explosion, a device 4-5 times larger than the Hiroshima bomb was detonated, however it failed to get the desired result. In Hungary, not only in the Makó trough, but also in Westerndanubia we have tried to extract gas with hydraulic fraccing method, but this also ended with failure. So, there is nearly four decades of work involved here. Then, in the U.S. in the mid-nineties, when demand for gas has increased, and gas prices also were on the increase, interest in the exploitation of unconventional resources were also revived. Today, one third of the United States gas production comes from unconventional sources.

- In Hungary, when was the start of this revival?

First, in 1998 a company named Gustavson Associates received a licence to utilize the Makó trough. In 2007, after several hundred million Euro expenditures this project has reached a new stage, having proved the existence of the BCGA and established the size of gas resource in the Mako trough, based on these achievements Falcon received the production licence. Today, preparations are under way for production.

- Why did Falcon bring ExxonMobil the world largest oil giant into this project two years ago? After all, Falcon was the battering ram, or did Falcon later realize that they are unable to extract the gas by themselves?

- Indeed, Falcon was the battering ram, because in Europe no one was doing such a purposeful deep-basin exploration for the purpose of exploitation. Already, in 1999 to 2000 we’ve established the connection with successful firms, including Exxon and other oil companies. We did complete three-dimensional seismic measurements on the entire area, drilled wells, and have shown the results continuously. By the second half of 2007 we had such an advanced and large database that was recognized by the international profession. We had a list of 20, and in the end we have succeeded to sign up with Exxon.

- Why MOL did not try to explore the Makó trough?

- MOL’s senior management thought it would have been high-risk component in their portfolio. The oil industry's history will verify or refute this decision validity.

- In addition, MOL is a much smaller company than ExxonMobil.

- The size does not play a role in this regard. With big companies all the plans that are approved based on project-level decisions. Just recently, Exxon started a 5-billion-dollar project in the Colorado-Wyoming states area, on the eastern slopes of the Rocky Mountains. At the time, I thought this would be detrimental to the Hungarian explorations. But I realized that was not the case, they also compose their portfolio from separate project elements.

-How big is this Makó gas reserve, because all these numbers in billions of cubic meters flying in the ether?

-The gas reserve is exorbitant. However, the American language is distinct in this regard; the term reserve is associates with storage, and the term resource associates with source. In our case, the "unconventional" place of occurrence, the latter definition is used. Thus, there is the given quantity of gas in the depths, but how much of it can we extract from the rocks, it is a technological question, and the answer lies in the future. In the case of the conventional gas field the yield is about 10% of the total volume. In Hungary the yield exceeds 20%, which is a very good number. The question is how much quantity we can extract from the Makó. And there lies the risk. That is why presently the gas in the Makó is called the source, instead of reserve.

-At what level MOL is involved in the project?

- MOL has a regional licence from the Mining Bureau. Exxon operates under the same license. South-Eastern Hungary two agreements were brought under one roof, a Falcon-Exxon agreement and a Falcon-MOL agreement of cooperation, moreover, the two are linked. Contracts between Exxon and other American companies have been brought to light.

- When can we expect to find the appropriate technology?

- The already proven American hydraulic fraccing technology needs to be refined and applied in the Hungarian conditions. As you know, there are substantial differences, for example, in pressure and temperature. These differences do cause difficulties, but also adds favourable conditions too. For example, in the factory charged soda bottle that has a predetermined carbon dioxide pressure, and then we double that pressure, we’ll end up with twice as much gas in the same size container.The same analogy applies here. If the pressure is greater, then there is a greater amount of gas in the same volume.

The higher temperatures also have benefits from the hydrocarbon generation point of view, since it is acting as a catalyst. In these deep troughs hydrocarbons still are created. Therefore it is strange to argue about the exhaustible fossil fuels and renewable energy sources, because the hydrocarbons are renewable. The only problem is that we consume them faster than it is formed.

- If the extraction of the Makó gas starts, can you describe the energy policy for the area? Can political conflicts intensify?

-For starters, we have to determine the forecastability of the gas market. Including the European Union's energy dependency as well. Hungary from the geopolitical point of view is in good location, since the energy supply for the EU comes from the East towards West-SouthWest, being one of the first countries along this line of supply always an advantageous position. Taking a long term view, 20-30 years, the EU's gas consumption unequivocally will increase. Taking into account the changes affecting the energy structure, in the short-term, it is unlikely that the gas would be replaced. The world’s natural gas reserves foreseeably will last 80 years more. Due to the fact, that we are constantly gaining a better understanding of the underground structures, the world’s natural gas reserves are increasingly growing. In Europe the gas consumption will increase over the next 2-3 decades, therefore the market is given. For that reason, I do not think that the Siberian gas versus other sources would cause any political complications. At the same time we need to take into account the investment needs of the research and production as well. For example, when we are talking about the Iranian gas, it is not the main problem what is the structure of the religious public system managed by the Persian state, but whether there are significant assets to be invested in the industry, so the natural gas could get here from there. Right now, these aspirations are unlikely. The situation is the same in Turkmenistan or the Caucasus. Obviously, sooner or later, there will be investments in the region and, consequently, the Siberian gas would have competition. The recent news about MOL’s investment in Iraq attests to that.

- The Russians have already put in the hands of the Turkmen gas, which hinders the Nabucco project.

- Whoever finances the investment, will obtain and markets the gas. Although Gazprom is one of the world's largest gas companies, it is not presumable that they would have a preference for funding the Caucasus over the utilization of the gas fields in Siberia. Since, in the case of the latter the continuous investment is much more preferable. By drawing a parallel, I do not think, that in the mid-term

there would be a continental confrontation.

- What the Mako gas will do?

-The Makó gas is in the same spin. If we succeed to start production - and we are talking about half a billion dollars invested, and therefore a significant amount of gas need to be extracted, so the investor will find a return on his investment -then we can contribute in a positive and stabilizing way to the supply of natural gas and reduce the EU’s dependence. But there are other considerations. The EU’s Eastern gas supply will be defined by the South Stream, the Nabucco, and the White Stream and by the LNG. All these sources will be needed. How these projects will develop over time, will not be decisive. Particularly, in what stage the Nabucco and South Stream will be in 2012. If the South Stream is built, then the tariffs on the transported gas need to be coordinated with those in the Brotherhood pipeline. In any event, it is clear, that the supply will stabilize; therefore any future Russian-Ukrainian gas dispute would not play a major role on future events.

- What effect the Makó gas would have on the Hungarian gas prices?

- The gas price is a regional concern. However, if the country has a substantial source, then the state will benefit. But it does not mean that the producer forced to sell at an anomalously low-price. However, there will be no need for strategic gas storage; therefore the consumer will save that portion off the price of the gas. Transit fees also will be reduced. There may be other benefits; peak demand on the system also makes it more expansive. The gas market liberalized in Hungary too, this also will have beneficial effect on the gas prices.

- Falcon currently pays 12% of royalties. Many think that is too low?

- This figure in the politician daily language is easily communicable. However, the royalties on the Makó gas cannot be compared with Arab countries for example. The Hungarian government, similarly with other EU member states does not invest in risky oil or gas ventures; meanwhile Falcon spent the price of two Danube Bridge so far on this project. In the Middle East the state pays exactly as much in public contribution as does a foreign entrepreneur, so 50% of the investments are typically paid by the State. Elsewhere, royalties may vary between 0-10 percent. Many people do not know that royalties are not taxes on profit; rather it is a tax on the gas comes out of the ground - regardless of whether it is profitable or at a loss for the company. Royalties are paid even on the volumes that are flared in the process of testing. The terms of an investment that will take years to complete, protected by licensing laws, and cannot be changed “while running”. At the same time, theprognostication of return on the investment, many years of production experience required.

- Why Hungary does not focus on geothermal energy, since we are rich in geothermal resource? Are the oil companies obstructing this effort?

- It pains me to hear, when energy companies opposes one another. However, different energy sources can be used side by side. The utilization of geothermal “nagyentalpiájú” (electricity generation) do not yet have the technological solutions, to address these questions require financial risk. The differentiation between sub-surface structures presents complications. During the process of earth-heat utilization we are faced with porous structures, it has different heat diffusion, than for example granite rock does. Hungary is in an excellent position; maybe we can mention Turkey, as a country that has significant potentiality for geothermal energy. In spite of these difficulties, maybe one of our drilling, which might not qualify as a gas producer, we would like to convert it to geothermal exploitation. It is a naive notion to think that this unlimited heat source is a given, all you have to do just bring it up to the surface. This of course only applies to the “nagyentalpiájú” energy, and not to the energy source used by medical spas, and none energy centric utilization.

-When will there be gas in Makó?

- Production could start in 2012.