European Commission to look into Hungarian MOL's mining royalty exemption
Wednesday, January 14, 2009 09:04:00 AM

The European Commission has opened an in-depth investigation to establish whether an agreement on mining royalties between the Hungarian government and fuels group MOL infringes EU rules on state aid. This agreement exempts MOL from the recent increase in mining fees due on revenues from hydrocarbons exploitation.

“The Commission is concerned that MOL may be favoured vis-à-vis its competitors. We have to make sure that no unfair advantage is granted to any company at the expense of Hungarian taxpayers," said EU Competition Commissioner Neelie Kroes.

Background

In November 2007 the Commission received a complaint regarding an alleged state aid measure put in place by Hungary in favour of national oil and gas group MOL.

The measure under investigation is an agreement dating back to 2005 between MOL and the Hungarian government, according to which MOL's mining royalty payments on extracted hydrocarbons remain fixed for the majority of its hydrocarbon mining fields until 2020, whereas the mining fee was increased considerably by an amendment of the Hungarian Mining Act in early 2008. (Amendments to the Hungarian Mining Act passed in early 2008 raised the mining royalty to 30% from 12% and changed the formula for the supplementary royalty.)

“The Commission is concerned that the combined effect of the prolongation agreement and the subsequent modification of the Mining Act leads to exempt MOL from taxes that its competitors have to pay, thereby conferring it an unfair competitive advantage," the EU executive said.

“In its preliminary assessment, the EC found that the measure may constitute state aid and found no grounds on which it could be compatible with the Single Market, since it would only relieve MOL from a charge it would normally have to bear," the EC added.

Such operating aid is in principle prohibited by EU state aid rules.

Hungary also wrote into the 2008 amendment the right to withdraw the exemption if MOL ownership changed - i.e. if it was acquired by OMV - so was seen as another step by the government to support MOL in its takeover battle with OMV.

Analyst view

“In the worst case the EC investigation brings the risk for MOL that it would have to repay the difference between the basic mining royalty rate and the benefit it gained from its exemptions," commented Bram Buring, analyst at Wood & Co., on Wednesday.

“Between 2006 and 2008 MOL paid upstream royalties in Hungary totaling HUF 334 billion (EUR 1.3 bn), which on a per barrel basis was about 20-21% of its average realized hydrocarbon price for each of those years. Right now we're not able to quantify by how much MOL did or didn't benefit thanks to its exemptions relative to an independent producer, but assuming the figures could be significant we expect a negative reaction to the news (announced about 30 minutes before yesterday's close) which could spill over into trading this morning," he added.