Thank you John for your engaging story on the Falcon saga. Although, I knew of your pioneering work on the Mako trough, I am sure many of the readers on this board have not heard of how all this had started.

I think The Wall Street Journal explains it all.

Exxon Deal Puts Obscure
Gas Deposit on Map

By GUY CHAZAN
June 26, 2008; Page B1

Budapest

Beneath the onion and garlic fields of southeastern Hungary lies one of Europe's best-kept energy secrets—a huge reservoir of natural gas long thought to be out of reach.

For decades, the Makó Trough was known only to a small group of petroleum engineers. But that changed in April, when U.S. energy giant Exxon Mobil Corp. bought into a venture working to tap the formation's riches. Before long, headlines here were proclaiming that not only would Hungary be self-sufficient in gas, it would be able to supply its Eastern European neighbors, too.

Falcon Oil & Gas
Falcon Oil & Gas's drilling wells in Hungary's Makó Trough gas reservoir

That won't happen anytime soon, because Makó (pronounced Mah-ko) is a tough nut to crack. Its gas is trapped in rock that isn't porous or permeable enough to let gas molecules flow easily through it. In past decades, major oil companies dismissed such unconventional oil-and-gas reservoirs as too difficult and expensive to exploit.

But rising energy prices and technological advances have turned these ugly ducklings into prime real estate. Oil companies can now extract gas locked in coal, sandstone or shale economically. And the billions of dollars they are investing to tap these resources may ease the burden of spiraling global energy demand.

Until recently, the U.S. was one of the few places where the oil industry was wringing out "tight" gas like that in Makó, with most of the production centered in the Rocky Mountains and East Texas. Exxon is drilling in Colorado's Piceance Basin, and Britain's BP PLC is developing the Jonah Field in Wyoming, as is Canada's Encana Corp.

Part of the success of those ventures is due to "fracing," a method of fracturing rock to get the gas inside moving. Now that technology is being applied outside North America, in places like Hungary.

Makó is widely thought to be the biggest onshore gas finds in Western Europe since the massive Groningen field was discovered in the Netherlands in 1959.

Denver-based Falcon Oil & Gas Ltd., which operates in Makó, estimates its license area alone contains a resource of some 44 trillion cubic feet of gas. That is three times as large as Britain's proven gas reserves.

But if Makó's potential is huge, so are its challenges. Much of its gas is buried at depths of more than 20,000 feet, and the farther down, the hotter it is. The temperature can reach 400 degrees Fahrenheit.

That is because Makó is located at an unusually thin spot in the Earth's crust, with molten rock relatively close to the surface. "It's still cooking," says John Gustavson, a Danish-born American geologist familiar with the trough.

The heat and pressure boost drilling costs: One of Falcon's wells cost $50 million to drill, a hefty sum for a small company. Falcon and its Hungarian unit employ a total of about 42 people, including full-time consultants.

But Makó has one big advantage. It is located in the middle of the European gas-pipeline grid. That would make it easy to export the gas to Hungary's neighbors, many of whom depend heavily on Russia for their supplies.

In the 1970s, a team of Hungarian geologists from the state-owned oil and gas company tried to evaluate Makó's potential. The results were mixed. "We knew there were hydrocarbons there, but we also knew the rock was low-permeability and low-porosity," says Gyorgy Szabó, who took part in the survey.

In the late 1980s, the World Bank financed a deep-drilling program in Hungary, supervised by experts from the U.S. Geological Survey. The results of that review ended up in the hands of Mr. Gustavson, who was touring former Warsaw Pact nations in 1991 on the lookout for oil and gas. In 1998 he acquired the license for a big chunk of Makó.

Mr. Gustavon tried to entice major oil companies into the project. None took the bait. One of the few oilmen who were interested was Marc Bruner, who had been the head of Ultra Petroleum, one of the first oil companies to see the potential in Wyoming.

Mr. Bruner formed Falcon to explore Makó and later bought Mr. Gustavson's license. Starting in December 2005, Falcon mapped out the borders of the trough with three appraisal wells, then drilled another three in the center of the basin. Helping them was Dr. Szabó, who became one of Falcon's directors in 2006.

They soon hit pay dirt. By May 2007 Falcon had won a production license from the Hungarian government for more than 245,000 acres—roughly the size of Los Angeles—which was one of the largest ever granted in Europe.

There were still many unknowns. Falcon couldn't work out what the flow rates of the gas would be, so it was unclear if it could produce the gas economically. The company was also running out of money.

So Falcon looked for a partner. In April, after months of negotiations, it entered into a $300 million production and development deal with Exxon. A few days later, Exxon announced another deal, with MOL Nyrt, the Hungarian national oil company, to start a joint exploration program in MOL's contract area in Makó.