Unconventional Exploration. Present For The Future.

SUMMER 2008 MOL GROUP’S BUSINESS MAGAZINE


MOL has begun activites into a new area of exploration. Increasing crude oil and energy prices, coupled with the shrinking of hydrocarbon resources accessible via traditional methods, has led to a redirection of attention into unconventional energy sources. MOL and Exxonmobil have launched a joint exploration, targeting at developing unconventional gas resources in the Mako Basin.

Unconventional gas resources might exist within geological structures and conditions different from conventional ones, thus they are only accessible by applying new drilling and exploitation technologies which are incomparably more expensive than recently applied technologies. Some resources may be developed profitably by conventional methods, whilst others require far greater efforts and much more financing.

Hungary is in a fortunate position as there might be huge unconventional gas resources, which are worth developing due to the recent energy prices. ‘True, we have just started to make more serious efforts to explore these resources, but the preparation was begun years ago. As for the existence of unconventional gas resources requiring completely new production technologies, we have been aware of this since the 1970’s and 80’s,’ explains Attila Holoda, MOL’s Vice President of Eurasian Exploration and Production.

Early hopes

A number of exploratory wells were financed by the World Bank (e.g. near Algyő, Hódmezővásárhely and Makó), and the company found that there was a declining indication of gas from these wells, which eventually stops entirely and the traditional methods yield no gas at all. The explanation for this phenomenon is that the gas is held by extremely tight sandstone rocks, which are highly impermeable. Thus it is not enough only to drill into the targeted structure – a way needs to be discovered to allow the gas be collected from these microcaverns and be transferred into tubing. For this to happen, the layer needs to be fractured.

During the hydraulic fracturing, the layer will be filled with the special material called propant, which creates an artificial permeability between the rocks and the
well itself. Although the fracturing technology itself is well known and has been widely applied for a long time, the existing geological conditions, high temperature and high pressure, are so unique at this basin, that the known procedure required major extra development before application. Geological risks and expected costs were extremely high and the market price of hydro-carbons was far below the current level, therefore efforts and development were cancelled.

During the decades which have passed since then, many Hungarian and international companies have explored hydrocarbons in Hungary. Some also made efforts in the unconventional basins, but so far not a single commercially marketable molecule has been produced from any of these. This is how the attempts by TXM Ltd.(a daughter company of a Canadian oil company, Falcon Oil and Gas) ended, even though they claim to have spent over $300 million on a Croatian drilling rig, American fracturing services and a 3D geophysical survey in Hungary. This company raised the possibility of huge unconventional gas reserves amounting to 600 billion cubic metres (later they even spoke about 1200 billion at one time 1500 billion cubic metres) and that Hungary may well become self-sufficient in gas and, in time, may even be able to export a considerable quantity.

Joint efforts for success

Based on present information, MOL currently estimates a recoverable gas reserve of up to 340 billion cubic metres. ‘The discrepancy between the two estimates does not come from any calculating errors, explains Attila Holoda, but probably from the size differences of the geological structure considered. TXM has estimated the whole reserves existing in the total Makó basin, while MOL only calculated that the upper formation of the structure, promises real production. TXM had been investigating the possibilities of the Makó basin for four years, when in 2006 MOL also decided to return to its previously interrupted project and join in with the unconventional exploration.

Wishing to share the geological and technological risks and extremely high costs of this new kind of exploration with a partner, they negotiated with several experienced companies and eventually agreed, in 2006, to conduct a joint technical study in co-operation with Esso, the European subsidiary of ExxonMobil. In the meantime, from the end of 2007 onwards, TXM had also been seeking a strategic partner to continue and finance its previously started exploration projects. Eventually, in early April 2007, it also chose ExxonMobil for carrying out a multi-stage exploration program in the Makó trough. Since, in accordance with the agreement between MOL and ExxonMobil, the Hungarian company had an option on entering the venture, not much later, when MOL acquired a 50% share of ownership in ExxonMobil’s share of TXM-Falcon exploration block, the three companies joined forces. The operator of the joint efforts will be ExxonMobil

Long term plans

Attila Holoda explained that in the first phase, the project entailed practically no costs for MOL. ExxonMobile drills two new wells in MOL’s acreage this year
and during the same period will test two existing exploratory wells in the TXM area.

Despite the fact that MOL and ExxonMobil have targeted more easyto-explore and more easy-to-produce gas resources than TXM are interested in, they are more careful on speaking about the potential of further production. There is no talk of gas exports; they are not even saying that the available technology might be applicable for lifting the gas existing at 300°C and a pressure of nearly 100 bars using the fracturing technique. All they are claiming for the time being is that after the successful well-testing, they hope to start the production in the Makó trough between 2012 and 2014. This should be preceded by sustained preparations,as unconventional exploration is much more costly than the conventional one. The wells need to drill deeper and the required number of wells is much higher than in conventional cases. It is estimated that around 2000 wells are necessary to acquire the whole gas reserve. Based on existing drilling service capability, MOL is expected to drill around fifty new wells per year. Interestingly, currently there are around 8300 wells in the country, 5100 of which are owned and handled by MOL, only a few hundred of these are still producing crude oil or natural gas


Differences in costs

While the drilling costs of conventional gas wells are between $2–3 million, unconventional wells may reach three or four times this amount. On top of it, 50 unconventional wells will require some new surface facilities costing approx. $30–40 million. However, according to MOL’s estimates, producing one barrel of (oil-equivalent) gas will cost only $2–3 due to existing low production costs, as MOL is the most cost efficient upstream company in Europe. MOL would utilize a technology specially reapplied and adjusted to the Hungarian conditions, developed earlier by ExxonMobil for production of unconventional hydrocarbons. The technology was already widely applied in the USA , and might promise further success in Hungary as well. At the same time, conditions here are very different from American ones – temperature and pressure are much higher and the targeted structures are very different regarding their geological age.