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Hungarian Oil And Gas Exploration Disappoints

Posted: Dec 17, 2009 10:39 AM by Eric Fox

Tickers in this Article: OTC:MGYOY., BP, NYSE:RDS-A, FO.TO, XOM

The hunt for oil and gas to meet the rising demand for energy from the emerging economies has taken the energy industry to areas of the world that have not traditionally been explored. Hungary is one of these frontier areas, and so far the limited exploration has been disappointing.

Europe, in general, has started to become more interested in developing its hydrocarbon potential. This is due to the higher prices for the commodity that were seen in 2007, and because of the continent's increasing dependence on Russia for its natural gassupply. The European Union (EU) imports more than 50% of its natural gas and 30% of its oil from Russia.

Hungary - The New Exploration Hot Spot

Many Eastern Europeans nations are even more dependent due to the former status as Soviet republics or as satellite countries during the cold war. Hungary has been mentioned as an alternative source due to its physical placement in the center of Europe, and the potential of its existing hydrocarbon basins.

Exxon Mobil (NYSE:XOM) has been exploring in Hungary in association with Falcon Oil and Gas Ltd. (TSX:FO). The two companies signed a joint development agreement in April 2008 on 184,000 acres in the Mako Trough. Exxon Mobil got 67% ownership in the original agreement in return for an immediate $25 million payment, and other development obligations. MOL Group (OTCBB:MGYOY) , a local Hungarian oil and gas company is also a partner in the deal.

The Results

More than two years later, the results have been disappointing. The companies drilled the Földeák -1 well, and fracture stimulated it at three different depths to test the commercial potential of the well. After the third fracturing operation, the well was plugged and abandoned pending further study.

Zsolt Hernádi, the CEO of the MOL Group, said that developing the play may not be commercial given the "current technology and in today's market climate."

MOL Group is the largest oil and gas company in Hungary, and is focused on exploring and developing additional areas in the Pannonian Basin. The company has a goal of tripling its production to 300,000 barrels oil equivalent (BOE) per day by 2010.

The other majors are not active in Hungary. BP, Inc. (NYSE:BP) only markets aviation fuel and lubricants in the country and hasn't made public any exploration activities. Royal Dutch Shell (NYSE:RDS.A) markets fuel in the country through a chain of filling stations and also has no publicly announced exploration activities.

The Bottom Line

Although the search for oil and gas in Hungary has so far been frustrating for the exploration and production industry, the need to find supplies will continue to drive the industry toward this area and others that have not been the focus of previous focus of exploration efforts. (To learn more, see our Oil And Gas Industry Primer.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator. Mr. Fox also publishes a paid investment newsletter. Please visit The Unknown Stock Report for more details.