Hungary MOL fails to turn up at ZMB BoD meeting to talk gas plant plans

Portfolio.hu

Tuesday, July 21, 2009 03:41:00 PM

Hungarian fuels group MOL has not turned up at the Monday meeting of ZMB, a 50-50% joint venture with Russneft and so the meeting has to be reconvened. The parties were to discuss the possible construction of a gas-fired power plant that could be a solution so that their license to the ZMB field deposit would not be revoked, Russian daily Kommersant reported on Tuesday, citing the Russian partner as the source.

MOL and Russneft have three members each in ZMB's Board of Directors.

The Zapadno-Malobalykskoye field (ZMB) produces some two million tonnes of crude oil annual on average, from proven recoverable reserves of 25 million tonnes. While oil extraction is not MOL's core business, ZMB is the largest extraction operation of the Hungarian oil and gas group and its only significant asset on Russian territory.

In the first week of this month Russia's environmental watchdog Rosprirodnadzor ruled the JV fails to meet an obligation to utilize 95% of the so-called associated gas that is produced when extracting crude oil.

Russia's Federal Subsoil Agency, also known as Rosnedra, gave the companies a six- month reprieve to rectify non-compliance unless they want their crude production license, which is valid until 2016, revoked.

2009.07.06 09:28
Hungary MOL has six months to comply with Russian rules at ZMB

Russneft proposed to build a gas-fired power plant by the end of the year, saying this is the only way to meet Rosnedra's requirement and keep the production license.

Russneft estimates the cost of the investment at 800 million rubles, cc. USD 25.25 million. It says the plant would be able to utilize 100% of the associated gas from the oil wells, which totalled 68 m cubic metres in 2008 and is expected at 55 m cubic metres this year. The company proposed to construct a 16 megawatt plant, adding the electricity produced by it could be used by the JV itself.

Kommersant noted that the relation between MOL and Russneft has not always been friendly. They even clashed in a legal dispute (MOL sued Russneft in December 2008 for unauthorized sales from MOL's portion of the joint venture's oil in 2008. MOL has lost the case in a court of first instance in Moscow). Meanwhile the relation between MOL and Russia became increasingly complicated, the paper said, referring to the acquisition of a 21.2% MOL stake by Surgutneftegas this year.

“The regulatory and ownership situation with ZMB and other Western joint ventures reflects the state-manipulated instability prevailing in Russia's oil and gas sector. The "legal chaos" or "legal jungle" metaphors, sometimes used to describe Russia's energy sector, are not entirely apposite, inasmuch as the Russian legal environment functions under state control, rather than in spontaneity," said Vladimir Socor (20 July), a senior fellow and long-time senior analyst with the Jamestown Foundation.

Kommersant also cited MOL CEO Zsolt Hernádi as saying in early July that it would not enter into a co-operation deal with Surgut under any circumstances even if it had to surrender its control over the ZMB field.

Experts talking to the paper, however, believe MOL will not just give up its crude production license at ZMB and it has no choice but to co-finance the building of the aforementioned power plant.

They also pointed out that ZMB is worth USD 500-600 million and the USD 25 million the construction of the new facility would absorb is negligible in comparison. They believe that if MOL still decided to opt out from ZMB it would do best if it sold its stake rather then just let is slip away.

The Surgutneftegas chapter, however, may be only part of a bigger story. Associated gas could have been pumped into the pipeline of Russia's state-owned oil giant Rosneft, but Rosneft would not allow that, Kommersaint reported earlier. Rosneft acquired the main production units from Yukos in 2004 and claims Yukos had no right to sell its ZMB package to Russneft the following year. This is why Rosneft turned to court with the aim to put its hands on Russneft's ZMB stake.