Hungary's privatization of its petroleum sector is back on track.
Efforts to sell partial interests in Hungary's two state owned petroleum companies are moving ahead again after a year of political wrangling over how their privatization should proceed. (OGJ, July 4, 1994, p. 21).
Hungary's State Privatization & Holding Co. (AVP) (98960 bytes) disclosed plans to invite a tender by the end of September to purchase a 75% interestless one voting sharein oil trader Mineralimpex.
AVP in May set the stage for the Mineralimpex sale by transferring the trader's assets to Hungarian integrated oil and gas company Magyar Olaj es Gaz (MOL). Sale of interests in Mineralimpex, the country's natural gas transmission/distribution networks, and state electric utility MVM is to get under way before AVP proceeds with sale of interests in MOL.
AVP late last month appointed London's Kleinwort Benson Ltd., Lazard Capital Markets, and Merrill Lynch to coordinate international placement of shares in MOL. Kleinwort Benson said as much as 30% of existing MOL shares are marked for sale to international investors, with another 10% to be placed within Hungary.
Pipeline, upstream updates
Meantime, Hungary continues to grapple with developing alternative supply routes for oil imports as a newly reopened oil import pipeline through Croatia remains idle because of the widening war in the former Yugoslavian republics.
In Hungarian upstream action:
- MOL is stepping up development of two of Hungary's biggest gas fields ahead of a planned sale of a major interest in the state company.
- Budapest signed contracts covering the first exploration concessions to foreign companies since before World War II. The initial contracts for five concessions were awarded last year. These concessions cover about 10% of Hungary's territory, while about 20% is reserved for MOL.
- The Hungarian Geological Service reported proved oil and gas reserves in the country are expected to last only through 2010 at current rates of production.
Privatization
A December 1994 decision by Hungary's government to merge the smaller trading company Mineralimpex with MOL was amended after months of lobbying by Mineralimpex managers.
Ministers had hoped to increase market value of the 88% state owned MOL by absorbing into it the 630 million forint ($5.5 million) share capital of Mineralimpex before offering a 30-35% interest in MOL, possibly beginning this summer.
After a cabinet meeting in July, the options were to sell Mineralimpex as a whole or privatize 70-80% of it, leaving MOL with a minority stake, noted Mineralimpex Vice Pres. Gyula Kajari. Either option would leave Mineralimpex intact to continue its diversification into nontrading activities upstream and downstream.
Mineralimpex's boldest new venture has been operating since late 1994, producing about 2,400 b/d of crude through a joint venture in Bashkortostan, Russia. Mineralimpex and CEIC, Toronto, each hold a 24.5% interest in the Bashkortostan oil fieldswhich feature a sulfur content of 4%with Bashnyeft state oil holding company owning 51%.
Mineralimpex ambitions go further, and officials at the company say lack of cash is the main reason experimental investments like this are so small. With local firms Maximovskoye and Chekmagushkoye handling production from the venture's 15 wells, Mineralimpex has not been able to play more than a financing role.
Hurdles
MOL and Mineralimpex managers alike talk of a culture gap that makes a merger of the companies difficult to imagine. Both refer to the other company as having problems with pride.
MOL has been cutting staff but still has more than 15,000 employees. Mineralimpex, on the other hand, is structured more like a consulting group, with 150 traders and geologists.
Major delays put the whole government privatization program behind schedule. The necessary law passed in early June, more than 5 months behind schedule.
Officials at MOL and Mineralimpex cite opposing lobbies within the cabinet that favor either faster or slower privatization, with oil and gas portrayed as especially strategic by those in favor of delay.
Because of this split among Hungary's ruling Socialists, it will stay very unclear, even if privatization seems to move forward, which group is winning the argument.
Mineralimpex managers are cautious about cheering their independence until the day the deal with a foreign investor is signed. The official consent for selling Mineralimpex intact came in a decision by MOL's board July 12.
Political concerns
The proposed appointment of Socialist party member of parliament and national trade union leader Sandor Nagy to the new post of economic minister worries reform elements in Hungary that support privatization.
Ex-Finance Minister Laszlo Bekesi described the appointment as a "built-in source of conflict."
A reshuffle creating three new Hungarian ministries, including the economic ministry, is still under discussion but has angered the coalition government's junior partners, the profree market Alliance of Free Democrats (AFD), which is threatening to quit the government.
Socialist rule is unthreatened. Socialists have a comfortable parliamentary majority to govern alone until the 1998 elections, even with the proreform voice of the AFD missing from the equation.
Energy price hikes
Bringing domestic energy prices to world market levels underpins Hungary's efforts to privatize its oil and gas sector.
Hungary's government at last report was proceeding with plans for an 8% price hike in gas and electricity prices effective Sept. 1.
Gas prices will rise 25% and electricity rates 18% Mar. 1, 1996. A third price hike, which would bring prices into line with world levels, is scheduled for Oct. 1, 1996, but the size of that increase remains undetermined.
Designed to make Hungary's gas distribution networksofficially on offer as of Aug. 10and MOL more attractive to buyers, the measure also is intended to help fill a budget shortfall caused when Hungary's highest court overturned part of the government's March 1995 austerity package as unconstitutional.
Raising energy prices to international levels is unpopular with voters. Some observers predict groups such as the Society of People Living on the Poverty Line will organize payment strikes once heating bills are issued by foreign owned gas utilities in Hungary.
Import concerns
While MOL and Mineralimpex remain hostile rivals for favors from government, Mineralimpex will end up on the losing side when it comes to retaining import connections.
MOL has renegotiated most of the oil import contracts previously handled through Mineralimpex. Mineralimpex still has access to MOL refining and pipeline facilities but at prices designed to defend and improve the dominant firm's control of the market.
Hungary is on the front line of a problem western European oil and especially gas producers fear. Russian oil and gas imports are cheap enough to undercut all other sources of supply, perhaps even Hungarian domestic supplies.
The Adria pipeline across Croatia, reopened last spring, will be an alternative source only if Hungarian refineries start buying lighter, sweeter grades of oil rather than Russian crude.
There is no market for Mineralimpex or other importers using the Adria pipline as long as MOL refines most of Hungary's crude oil and chooses which grades to market and the Adria delivered price stays higher than the Russian price at the Ukraine border of the Druzhba (Friendship) pipeline.
Adria pipeline
After initial euphoria at the Adria pipeline reopening early this year, the pipeline has remained idle.
Crude paid for and trapped inside the line for the 2 years since the Yugoslav war shut it down was pumped through and supplied to original buyers. Since then, continued security worries and lack of demand keep the line idle.
Croatian army reoccupation in May of the Slavonian region of Croatia highlights the strategic importance and vulnerability of the pipeline, currently wholly under Croat control.
Rebel Krajina Serbs had controlled two other sections of the pipeline route and insisted they would retake the recently recaptured section between Sisak and Bosanski (Slavonski) Brod. That came before the Croats' successful offensive and the possible widening of the Balkans war as Serbian forces advanced on the Krajina area.
If the Serbian-Croat conflict does not reignite, possible loss of support from Serbia and Bosnian Serbs for the Krajina Serbs as an organized entity makes terrorism more rather than less likely.
MOL's Denes Buda said his company has been invited to bid for a 15% stake in the Croat state controlled Adria pipeline. Sept. 27 is the Croat government's deadline for bids.
Buda mentioned a possible joint bid with Austria's 49% state owned OMV for the pipeline offer.
Meantime, MOL continues laying a pipeline to connect with Austria's gas network next year at Baumgarten as Hungary's only real strategic alternative to Russian hydrocarbon supplies. Supplying Russian oil and gas to western Europe through Austria in the future still looks more attractive than investment in another import route.
A proposed pipeline mainly through Slovenia, north of Croatia, skirting South Croatia's Serbian and Bosnian trouble spots would need to supplyand be financed bya more sophisticated industry than eastern Europe has in order to compete with Russian supplies.
Ironically, any real prospect of peace in Yugoslavia results in a fully secure Adria route, which would kill chances of an alternative Croat-Slovene pipeline.
Concession contract
Hungary's Industry & Trade Ministry in early August signed a contract awarding a 35 year concession to Blue Star Corp. covering the 895 sq km West Nagylengyel block and the 2,297 sq km Inke block in West Hungary (see map, OGJ, Aug. 29, 1994, p. 32).
It is one of a handful of concessions tentatively awarded under Hungary's first oil and gas concession round, a tender process that began in 1991.
The initial exploration term covers 4 years with a 2 year extension option. Concessionaires have an option to extend the total 35 year term once, by 1712 years. Royalties are 12% for oil and gas.
Following geological and seismic studies, Blue Star plans to spud a deep wildcat in the term's second year at a cost of 12-15 million forints.
Blue Star, with offices in Rome, is incorporated in the U.S.
Oxy concession
An Occidental Petroleum Corp. unit signed 35 year concession agreements for the Heves I and Heves III blocks awarded in August 1994 in Hungary's first international bid round.
The blocks are located in the Paleogene basin of northern Hungary.
A 500 line km seismic survey is to begin in late 1995, and one wildcat is required to be drilled on Heves I during the first 3 years of the exploration term.
Several shallow oil and gas fields have been found in the Paleogene basin. Oxy will explore for deeper objectives in structures similar to those found in other producing areas of eastern Europe.
Oxy has a 100% interest in the 247,000 acre Heves I block and a 50% interest in the 198,000 acre Heves III Block, with a subsidiary of Mobil Corp. holding the other 50%. Oxy is the operator of both blocks.
Mobil Erdgas-Erdol GmbH is close to signing a concession contract covering 927 sq miles east of Budapest. The company had been negotiating interests in eight blocks, including three to be operated by Oxy.
Coastal concession
Coastal Corp.'s exploration and production subsidiary in late August signed a 100% owned concession contract to explore for oil and natural gas on 568,000 acres in Central Hungary.
Coastal Oil & Gas Corp. soon will begin 2D seismic surveys on the block, which covers a largely unexplored area bordering Lake Balaton about 65 miles southwest of Budapest.
The seismic survey is to get under way after Coastal completes a technical study within 60-90 days.
Terms of the contract were not disclosed.
Gas development
Timed before a tender expected soon for a sale of 30% of the company, MOL disclosed it will start up two gas fields in Southeast Hungary's Bekes county next year.
Found in the 1970s, the fields have been made economic by upgrading last year of local gas processing facilities. MOL plans to spend 1.5 billion forints ($12 million) from cash flow to produce gas from 17 wells in the two fields.
Devavanya is to produce 6.8 bcf during 1997-2000, initially needing an investment of more than 600 million forints. Totkomlos is expected to produce 20.2 bcf during 1996-2002, initially needing an 890-900 million forints investment.
One U.S. dollar is now worth 130 forints, but scheduled devaluations this year will take the exchange rate to $1 U.S. to 140-145 forints, making the project's estimated total earnings of 15 billion forints dependent on vague forecasts of costs and prices.
Gas consumption in Hungary ranges from a minimum 24.5 bcf/month to more than 35 bcf/month in the winter.
Production outlook
Hungary currently produces about 35,000 b/d of oil and 470 MMcfd of gas.
MOL in late July noted that Hungary's gas production of more than 168 bcf/year accounts for 45-48% of current consumption.
That volume is expected to drop to 112 bcf/year, or 30-40% of consumption, by 2000 and 87.5 bcf/year, or 25-30% of consumption, by 2005.
Domestic oil production provides about 20-24% of current oil consumption. This is expected to fall to 24,000 b/d, or 15% of projected consumption, by 2000 and to 16,000 b/d, or less than 10% of consumption, by 2005.
Janos Tanacs, head of the energy research project of the State Geodesy Institute, estimates Hungary's reserves at 132.1 million bbl of oil and 3.4 tcf of gas. That is equal to 30% of the oil and gas produced in Hungary since commercial production began in 1936.
Recognizing the growing domestic oil and gas shortfall, MOL has sought to develop oil and gas reserves abroad by acquiring exploration licenses in the former Soviet Union, Algeria, and Tunisia.
MOLS GAS DEVELOPMENT PROJECTED OUTPUT
1996 1997 1998 1999 2000 2001 2002
Field Million cu m
Devavanya NA 77 60 42 16 NA NA
Totkomlos 87 120 125 89 73 50 33.1
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