Do we need Makó?

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Opinions are diverse in this impassioned public debate about this very large unconventional gas resource concealed beneath Hungary: Some would see it as an opportunity to reduce our dependence on foreign energy supply; then again others could only perceive it as another conquest by the global capitalists. This article - by using the information and data that was gathered to date from the companies involved in the exploitation - will attempt to outline the advantage and the disadvantage of this development.

As with any very large project, the uncertainty and scepticism is not surprising:

However, it’s not about the gas that surrounds Makó, but rather the cloud of secretiveness that hangs over the project. This could be attributed to the fact, that TXM-Falcon wasn’t sure of the size of the resource until 2008, therefore all data pertaining to the size, and the details of the required technology to exploit the resource were treated confidentially. Therefore, in the absence of facts, various urban legends took to wing in the form of emails, blogs and newspaper articles, and many of those had nothing to do with reality

Early history

The history of Hungarian unconventional gas resource (This term refers to the location of the gas, that is situated very deep underground, and in these depths the rock has very low permeability, meaning the gas bubbles poorly connected and the gas stuck in the tiny capillaries, and the gas production requires special technique) goes back to the '60s. In 1967 the OKGT (National Oil and Gas Trust) started the Makó project with drilling the Mako-1 well; the deepest well in the project the Hód-1 was completed in1972. These wells have been largely exploratory in nature, due to the fact that at the time the industry lacked the necessary production technology, and the fact that the plentiful traditional resources did not encourage the R & D for this type of investment.

In September 1998 the project has arrived to the next major step: then TXM-Falcon received an exploration permit in the Makó trough. At first, it was not plausible that Hungary would become a major expansion for the company, because the first exploration results were not too encouraging, secondly, exploration projects were at 10 years low and hit rock bottom because of cheap oil, and the required advancement in technological developments have not kept pace. In the end, Falcon chose Hungary for having the most promising unconventional gas play from a group of 16 countries with potential unconventional gas fields, for example China, Denmark, and Turkey. Indeed, Hungary provided the best conditions for a successful production start: having the right geological conditions, a potentially very large size resource, political stability, favourable fiscal regulations and low taxes (18% income tax rate, 0% for export, not to be confused with mining royalties) , have created ideal conditions for investment. Also, the close proximity of the Baumgarten gas distribution center in Austria played a major role in the decision, which will allow for cheap and efficient transmission for exporting gas in the future, and the fact that other than the Russian gas, there are no major competitors in the region. What's more, thanks to the apparently unstoppable deceleration to find new resources, and to the greatly increased domestic consumption, the Russian exports in the long-term doomed to decline.

The drilling

The three-dimensional seismic mapping of the Makó-Földeák field began in 2003, followed by further research until 2006, when the actual drilling started. The first drilling started at Pusztaszer-1, followed by another five, Mako-6, Székutas-1, Magyarcsanád-1, Mako-7, and Mako-4. In addition, Falcon has conducted seismic studies on five more locations - more than 1100 km2 in total area. Falcon’s deepest drilling ever was completed that year, in the Mako-6 well the drill head reached the total depth of 5692 meters. Just to put it in the proper perspective, conditions are extreme in those depths: temperatures of 250-300 ° C are dominant, and the pressure is more than 1,000 atmospheres. Against this background, you can only guess just how difficult of a technological challenge the extraction represents.

In April 2008, the U.S. oil giant Exxon has purchased 67% interest in Falcon’s Hungarian gas play, then almost immediately Exxon sold 50% of its interest to MOL. What is significant that it was the first time since World War II, that Exxon left the American continent for gas prospecting and exploration purposes. MOL, despite their many parallel projects immediately agreed to take part in the project, even though the venture entails some risk.

The resource

The scramble is understandable, since the size of the resource ishumongous: According to the most pessimistic estimates, the Makó trough contains 40 TCF of gas, which is 1100 billion cubic meters; in addition to that, there is also 100 million barrels of oil. The more optimistic projection assumes double of theaforementioned figures. Hungary’s consumption averages at an annual 13-15 billion cubic meters of gas (of which 80% are imports), so assuming that consumption stays at current levels, then the resource would be sufficient for more than 70 years. If the production can be ramped up to 80-85 million cubic meters per day (average temperature is -10 C °, daily peak consumption) or even above that, there would be plenty to export. The gas consumption is likely to decline in the 25-year horizon, due to the entry of renewable energy capacity and the role of nuclear energy, however they are expected to replace the outdated oil and coal-fired power plants, so the demand for gas in the gas importing countries will persist. Many countries already switching to gas from the oil or coal-fired electricity production (it is becoming increasingly important because of the tradable CO2 quota) even if they do not invest in nuclear or renewable energy. Thus, this increases the ratio of gas in the fossil based energy production, or at least maintains the demand at current levels for a longer period of time – however even a greater growth cannot be ruled out.

The export

The issue of exports plays a central role, because the internal market often generates less profit than when the gas was sold abroad, since in the case of latter there is no gas price support, thus this should be more favourable for profit. In addition, being in an exporting position adds serious weight to a strong foreign policy attributable to the country; as it is observable in Gaddafi’s Libya, and in Chavez’s Venezuela. Without the oil and gas wealth their role in the world political arena would be more comparable to countries such as Hungary. If we can ward off, the biggest future rivals, namely Russia and its "hand-operated" company Gazprom, to prevent it from gaining an even larger share in MOL (through the shares that was transferred multiple times and bought this spring by Surgutnyeftegaz) and in the pipe lines in surrounding countries, then the Makó gas could provide an economic and financial superiority to Hungary, the kind of which never yet resulted in her history.

The facts

The Russian model countered by export, together with other gas-related revenues, it would not only enrich the state’s budget, but it also would enrich the companies involved in the project, after all the hope for profits is the reason why they began the exploration. Of course, the objective for all three companies is to represent the interest of the shareholders. However, I would like to point out here, and dismiss the widespread myth that "the companies extracting our country’s gas wealth ‘de facto’ stealing it from us". This allegation specifically refuted by the following:

- In Hungary, mining royalties paid by the producing mining companies at international level is too high (12%) be paid to the treasury. (In other countries, for example, Slovenia 1-5%, 2-7,5% of Australia, Brazil 0,2-3%, India 5%, China 1 -4%)

- Currently, Falcon, ExxonMobil and MOL can provide investments even under the current financial and economic circumstances, and can finance this large-scale project and do not cause significant delays (eg, during political change of guard).

- The necessary technology required to explore and exploit the gas field is owned by these companies. Contrary to popular belief, the details of these technologies are not publicised, and are not bartered in the open market, expensive improvements treated as a trade secret, and it is jealously guarded by the companies. Without these companies the gas wealth would have been left in the ground even for decades, because the state would be faced with not just financial but also with technological barriers.

- To satisfy internal consumption, Hungary would enjoy a lower cost for gas delivered from companies holding the concessions, than from current sources. I would like to point out that major production can be launched around 2015, there is little likelihood that because of the current economical downturn the depressed world market price is maintained. In fact, very strong price increases expected because of the exhausted - and the new explorations only partially replacing the declining productivity fields, so it’s not inconceivable to imagine an increase of multiple times the current price.

- The necessary infrastructure for exploitation, new pipelines and building extra storage capacity by itself would have serious impact on the stimulation of the economy. Two examples: the production and the associated logistics and the future development of the related industry (LNG, petrochemical industry) create jobs, the associated R & D sector would be a major factor in the development of the largely service-based, monoculture marketing structure.

The black soup

However, after having mentioned all the benefits, we should not ignore the fact that non-conventional extraction still has serious obstacles to contend with. Currently, the project consists of 6 drilled wells. And up to 3 additional drilling commences in 2011: The Földeák-1, which is Falcon’s, and another two that is Exxon-MOL’s. There is the Makó-West, where MOL and Exxon are working, in the Makó-East where the three companies jointly pursue the research. In the case of positive outcome of these drillings, MOL predicts the post-2012 production start; however the start-up volume is still in question. Also, it’s important to mention that in Békés and the Derecske basin MOL is the only operator, while in the Drava and Zala basins the Croatian INA begin a joint operation with MOL. This will also make the NETS (New Europe Transmission System); running under the Adriatic Sea, the Central and Eastern European systems, plans to combining the pipelines is prepared, to which production from the Makó would be linked.

The extraction - new mining training

The non-conventional gas field is significantly more complicated - eg. different fracing procedures and / or horizontal drilling technology required for extraction of the gas - than traditional gas fields. Drilling for unconventional gas usually faced with very difficult circumstances, but thanks to the earth's crust in the Carpathian basin, drilling towards the bottom, the temperatures are rising twice as fast than any other parts of Europe. After exceeding certain temperatures it will requires very expensive measuring procedures to be used (eg, filling pressure increment measurements), the cost often exceeds all predictions. Thus, the planned production in the middle of next decade seems somewhat as an optimistic goal, and assumes high world prices for fossil fuels, and development projects require an unbroken momentum. In 2009, this momentum, due to the global crisis and a dive in energy prices, was broken worldwide. However the Makó project was not affected by it, so there is no reason for pessimism; five years ago, the current results would not have been forecasted, and you can speed up the extraction in parallel with advanced technology research and development. Makó also gives another chance to resurrect the now almost entirely disappeared Hungarian gas and oil miners training program, due to increased demand for industry professionals.

The profit

I consider it important to add, that the non-conventional gas is expected to be very competitive, when the world market price will be three times higher than currently is. The LNG (Liquefied Natural Gas - LNG), with additional cost due to the liquefaction process and logistics, is slowly becoming profitable. Despite all this, Hungary should include in its long-term plans the LNG, for one reason, the close proximity of Croatia, and the existence of developments in this direction (Adriatic LNG, terminal on the island of Krk) and the other reason is the possibility to excess the markets of countries that isolated from the Russian gas exports. An advantage in a piping system can become a disadvantage if the network system can be used by the competition. The listed regional or even geopolitical advantages and the question of the secure supply are not negligible. Our country would become self-sufficient, with time would become completely independent from gas import, on which we are largely dependent from the east through an often unreliable channels - just think of the recent Russian-Ukrainian gas crisis. To this asymmetric situation, even the Nabucco cannot provide a permanent solution (I wouldn’t want to mention the South Stream here), since the gas supply comes from a politically unstable region, which is under a very strong Russian influence. China also interested in this area, since becoming a world power, despite its fabulous coal resources, its hunger for energy only growing larger. The NATO with its second fiddler power position in Afghanistan cannot do anything about that, moreover, the only superpower, the United States backed away from confrontation with Moscow over Georgia. Political stability in the Caucasus undoubtedly is essential for the safe transportation of the Middle East gas to Europe.

The Conclusion

The Makó project can be seriously endangered by internal political tension that generates opinions - that often leaning towardsdemagoguery – about the potentiality of the extraction of resource and the redistribution of the resulting profits. In order to place the issue of the gas wealth in the proper perspective, we need to create a broad political consensus, for which, unfortunately, in the near future there is very little hope. We should not let the gas wealth issue become the victim of current-political attacks, and we also should guard it from any party that attempts to grab the initiative and gain exclusive decision making rights. The Hungarian policy must adhere to European standards, distance itself away from the Russian energy model, where due to xenophobia the foreign R & D capital was driven away, and the foreign investor’s confidence is at an all time low. Now this poisonous fruit is about to ripen. Russia cannot replace lost production of the declining oil fields due to lack of development and research, and the new capacity hindered by serious delays; due to outdated production technology Russia’s large gas fields are on the brink of collapse, the piping system is also under stress and operating at the margins of safety. Therefore it is evident, that the self-serving, demagogic energy policy can be harmful even to the Great Powers those posses’ gigantic-energy supplies.

In the coming decades, the central focus of world will be about the issue of the secure energy supply. The Makó gas resource will provide a very significant portion of our country’s energy needs, so we all have a common interest, it is a treasure that lies beneath our feet, created by nature over millions of years, and let’s preserve it for ourselves and our descendants. For this, we need a social consensus, which will not bow to short-sighted, petty political interests.