The gas is there!

We are so wealthy, that we cannot even imagine so much wealth. Gargantuan gas fortune lies under the Makó trough in southeastern Hungary. We are talking vast quantity of gas that would cover Hungary’s energy requirement for a hundred years. Yet, this resource is not ours for quite a few years now.

It has made a great sensation a couple of years ago, when the media announced the Makó resource for the first time. Immediately, most Hungarian’s first thought was, finally we can say good-bye to the Russians. Afterwards, all sorts of calculations saw the daylight, for example, this resource is so huge, that from the gas export alone, in about 10 to15 years time, Hungary’s standard of living would match that of Austria. Soon after, all that early enthusiasm died down, it has become known that the Canadian Falcon Oil & Gas Ltd owns the exploitation rights to the Makó trough. Therefore, the 1500 billion cubic meters gas resource belongs to Falcon. Hungary would only get the 12% mining fee.

Old history

In the opinion of György Szabó, CEO of TXM Kft, the subsidiary of Falcon, the 12% mining fee is substantial and reasonable. The company could have built two bridges across the Danube from the $250 million they have spent to explore and drill seven wells in the Makó trough. Also on the pipeline that connects to the Algyő distribution station. Furthermore, nothing has stopped, the research and experimentation continues, full production most likely starts in 2012, and it is still unknown how much money required developing the right technology.

Latorcai János a KDNP politician has a different view. He thinks the 12% mining fee is to low, when you consider the size and the strategic importance of this resource. In his opinion, there are other European countries where in similar cases the mining fee is up to 50%. He believes, it is conceivable that in the future the Hungarian state could challenge Falcon in civil court about the disproportional benefit.

The present situation is a sort of an end result. This story has started a long time ago, more than thirty years ago. Mol’s predecessor OKGT a state owned Oil Company started the exploration of Makó Basin, and of course, they have found the gas. However, this gas resource lies deep underground; in fact 6000 meters deep in a very tight rock formation. For that reason, it is often called tight gas. At that time, the experts deemed the resource unexploitable.

And it stayed that way for a long time. However, in the 1980’s, the WorlBank provided Hungary with a large credit to continue with the exploration of the Makó Basin. The operations were supervised by the American Geological Agency. The Hungarian experts remained skeptical, only György Szabó believed that some day the Makó tight gas would be brought to production. György Szabó was at the helm of OKGT at the time, yet the Hungarian experts viewed him as a fanatic. György Szabó feels that they still think of him as such.

In the early 1990’s in the US, an attempt was made to exploit the tight rock formation with nuclear explosions. The nuclear charge was 4-5 times larger than the Hiroshima bomb, but it failed.

After the1989 change of regime in Hungary, all the exploration data from the Makó Basin ended up in MOL’s hands, yet MOL did not apply for priority exploration license in the Makó Basin, because the experts stuck to their earlier opinion that the Mako’s tight gas is unexploitable. At that time, 8 to 10 oil concerns were looking for prospective plays in Hungary. According to the Szolnok Mining Bureau, an American company named Gustavson Associates applied for and received and exploration license in 1998. However, the company was lacking funds and the exploration never got off the ground. That is when Gustavson started marketing the license including all the Hungarian data. However, the large companies- for example the OMV- were not interested. That is when Falcon showed up.

Pressure relations

In 2005, the Canadian Falcon Oil & Gas purchased the exploration license from Gustavson, at the same time TXM Kft was created for the Hungarian operations with György Szabó at the helm. In 2007, the company was awarded the production license in the Makó trough. The license is good for 35 years that is expandable for another 17.5 years. Naturally for12% mining fee.

The Szolnok Mining Bureau has confirmed that documents do not prescribe to TXM how much of the gas produced is sold to Hungarian consumers or how much of it exported to another country. György Szabó said that any prescribed conditions would be anticompetitive. In János Fónagy a FIDESZ politician opinion, the Hungarian state should have ensured itself a strategic advantage. If the domestic oil industry is not prepared to tackle the tight gas exploitation, and for that reason foreign companies allowed to exploit the resource, then only 30% of the resource should have been offered in exchange for the required modern equipment and technology.

In the interim, in the USA, oil companies successfully developed the technology required to exploit the tight gas formations. The technology now is so advanced, that 30% of the US gas production comes from the deep unconventional formations. Falcon has successfully applied that technology in the Colorado Rockies. Originally, they promised production in the Makó by 2008, but there is no producing well yet. György Szabó says, the required technology still not proven yet, the method used in the Rockies will not work in the Makó, here the gas is deeper, the temperatures and the pressures are greater.

In the quest to find a solution to the Makó trough, Exxon and MOL have joined forces with Falcon. Last year, to exploit the Makó trough, Falcon formed a consortium with Exxon & MOL. In György Szabó’s opinion - who admittedly has dedicated most of his life to the effort to exploit the tight gas in the Makó trough - this task is a realistic one. Otherwise, Exxon with its huge capital would not have joined this venture, let alone MOL whom were asked several times in the past.

Volatile media information

A variety of information floating around in the media, for example, you can hear that the consortium planning to extract only 10 billion cubic meters of gas per year, and then it wants to export most of it to Austria and Serbia. Albeit, Hungary’s energy requirement is 14-15 billion cubic meters, therefore, the minimum production that would guarantee Hungary’s independence from the Russian gas ‘Weapon’. There are theories by some, if the extraction is so expensive, than the Makó gas will be too expansive for the Hungarian consumer. By some opinions, sighting the $25 billion development cost, the price could be $500-600 per 1000 cubic meters, oppose to the present $400.

It is ‘nonsense’ said György Szabó, this is a guessing game. You cannot speculate about future exports and gas prices until you can demonstrate that you have the technology to extract the gas from the Makó trough. He also added, relatively the Hungarian consumer would pay less, because they would not have to pay for storage and transit fees.

János Fónagy does not like the deal with Falcon. Since some of the Hungarian oil experts do not believe that technology can solve the geology in the Makó trough, therefore won’t be any production. Fónagy does not want to rush anything, he says, it is enough to know that the gas is there. Some day, the time will come, when the tight gas exploitation becomes routine even for the Hungarian oil companies.

Few people know that besides the Makó through, there are four other gas fields that are at least as large as the Makó field. Already, foreign companies are busy to explore them. It is important to know that the Makó alone is one of Europe’s largest gas fields. We are also very rich in geothermal energy, that is, would be. The Bajnai government wants to change the mining royalty rate for geothermal energy. The MSZP government only wants 2%.

Free flow

After the 1989 regime change, Prime Minister Jozsef Antall, signed a document which allows, without restriction, foreign investors to invest in the Hungarian energy industry. Later in 1992, the concession law was passed confirming Antall's signature, then in 1993 the Mining law was passed. These changes brought the Hungarian laws into total harmony with the EU's most important rights by making the free movement of capital enshrined in the Hungarian laws.

Makó and Russia

When you read about the Makó gas field in the Russian press, you get the sense that they are not worried about the Hungarian competition. Russia produces 500 billion cubic meters of gas per year, and that means that Makó - in theory only – that Makó could replace or neutralize the Russian gas weapon for only three years.

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