2009 was a key milestone in MOL’s upstream history dramatically redrawing MOL’s upstream map. Following numerous relatively smaller acquisitions in recent years, MOL has added significant impetus to its further growth by gaining operative control of INA and through the acquisition of 10% in Pearl project. The current upstream portfolio consists of producing assets in 7 countries and assets with further exploration potential in all 15 countries where MOL Group is present.

By the end of 2009 MOL Group increased significantly its 2P reserves to 665.1 MMboe from 532.6 MMboe at the end of 2008, as a result of our further successful exploration activities and full consolidation of INA. Average production was 108,000 boe/day in FY 2009 and it was 142,500 boe/day in Q4 2009. Despite the challenging market environment, MOL remained one of the most profitable upstream players as a result of several optimization and efficiency increasing programs carried out in 2009.

Competitive advantage in terms of unit costs

MOL, INA and their legal predecessors have performed exploration and production activities in Hungary since the 1930s and in Croatia since 1952, therefore we accumulated vast exploration and production experience. In the last two decades, we have demonstrated our ability to our international and local partners as well as to the local authorities that we are able to operate various stages of projects in a professional, competent and effective way in very different parts of the world.

MOL achieved noticeable exploration performance in 2009, resulting in a chain of successes in both domestic and international exploration, with an overall 69.2% success rate on the drill-bit, underpinning the expertise and local knowledge of our staff.

Despite a difficult period in 2009, characterised by economic woes coupled with a broader financial crisis, MOL remained one of the most cost efficient operators amongst European players. The low unit production cost (without DD&A, without INA) of 5.2 USD/boe in 2009 is a result of our commitment to continuous technology development and implementation of different efficiency increasing programs. In addition our production related energy consumption was also decreased.

Key developments in 2009

Focusing on stable cash generation in Hungary…

Although MOL decided to cut back CAPEX budget in 2009 as a response to the financial crisis, MOL Upstream significantly contributed to Group level cash flows despite lower oil prices realized than in 2008. Our main focus was on field development projects with early cash generation and committed work programs in exploration activities.
In 2009, Hungarian oil and natural gas production was 57,500 boe/day, down by 7% compared to 2008. Hungarian crude oil production (without condensate) remained stable at 14,800 bbl/day, condensate output was 6,700 boe/day, while natural gas production (net dry) decreased to a rate of 36,000 boe/day. These production figures were in line with our expectations.

...while we developed further our Russian and Pakistani assets

In 2009, our share (50%) of crude production from West-Siberian Zapadno–Malobalik (ZMB) field, operated by our Joint Venture with RussNeft reached 15,000 bbl/day average production. During 2009 two new vertical wells were drilled.
At the end of 2009, a total number of 216 wells (producing, injection and water wells) were in operation on ZMB field. In July 2009, Russian state mining authority “Rosnedra” examined fulfilment of license obligation by ZMB JV with the possibility of license revocation in case the required 95% utilization of produced associated gas in the field is not achieved. The Joint Venture approved a new work program to fulfil the obligations set out by the authorities, which includes installation of gas-fired power generation units. During 2010, 10 new wells are planned to be drilled. In addition the electricity generated will be utilized in the oil production process of the field after Q2 2010.

In 2009, our continued developments in Baitugan field resulted in a 3,000 bbl/day average daily production, a 40% increase compared to 2008. Altogether 38 new wells (including one horizontal well) have been added, and water injection has been started to increase the production rate while the reconstruction of the Central Processing Facility and the extension of the gathering and power systems are in progress. The processing and interpretation of 3D seismic was completed. Based on this, preparation of a new field development plan has commenced. The drilling program for 2010 includes 29 new production and injection wells.

On the Matjushkinskiy Block daily production increased by 52% in 2009, reaching a 2,000 bbl/day average production rate. In 2009 we were focusing on the development of the Ledovoye field with 8 production wells drilled and capacity of the surface facilities extended, allowing us to further develop the block. In 2010 on the Ledovoye field 5 further production wells are planned while development of the Kvartovoye will commence in 2010 as well.

In 2009 MOL had its 10th year of successful presence in Pakistan. During this period MOL discovered 4 significant gas/condensate fields and executed sizeable surface development activities. The newly constructed Central Processing Facility on Manzalai Field was inaugurated in November 2009, resulting in a year-end production rate of 220 MMscf/day gas and 4,600 boe/day condensate. With the commissioning of further development wells production rate will surpass 250 MMscf/day gas and 5,500 boe/day condensate by early 2010 (out of which MOL’s share is 8.42%), providing 6% of total gas supply of Pakistan.

Fourth consecutive year with more than 60% drilling success rate in CEE conventional exploration…

Our conventional exploration activity in Central Europe reached an outstanding 75% success rate in 2009: 8 exploratory wells were drilled and/or completed, out of which 6 encountered commercial quantities of hydrocarbons. Four of them (Jh-D-1, Kág-4, Vízvár-S-1, Zsáka-1) discovered new gas pools while two of them (Mbh-K-1, Ócsa-2) resulted in new oil reserves, adding approximately 8.5 million boe to our SPE 2P reserve base. This strong success ratio justifies our strategic decision to extend our exploration also towards smaller geologic prospects with lower technical risks, close to known petroleum accumulations. In 2009 we continued our successful cooperation with INA in the Mecsek-West, Podravska Slatina and Novi Gradac licence areas, and Hungarian Horizon Energy on the Darvas-Komádi and Vésztő licence areas, while in addition new partnerships have been established with Ascent Hungary and RAG.

…and further developments in CEE unconventional exploration

Since the end of 2007, MOL has built a multi-element unconventional gas exploration portfolio by establishing its presence in all Hungarian unconventional basins. During 2008 and 2009 an extensive work program was completed in the Makó basin (consisting of Makó-East and Makó-West areas) in partnership with ExxonMobil and TXM by drilling three and testing two exploration wells. The tests were technically successful, but the results have not justified the preliminary expectations yet. On the basis of the data gained, in February 2010 ExxonMobil and MOL decided to withdraw from the Makó-East project. In Makó-West area, there are no operational activities planned for 2010, decision about further activities is expected later this year.
In the Békés basin MOL drilled one well on its own exploration license in 2009, which has reached the initial targets, proved elements of the unconventional play and the presence of gas. The project will be continued after the analysis of the well results.
In the Derecske basin MOL has launched an exploration program by drilling two wells, which both proved the presence of hydrocarbons in tight reservoirs. Based on the positive results of these wells, MOL continues the exploration program in this promising basin without involving another partner at this stage.

Several successful high-impact wells drilled in the international arena with significant discoveries in the Kurdistan Region of Iraq, Kazakhstan and Pakistan

In Northern Iraq Shaikan Block (K-5), the Shaikan-1 exploration well (operated by GKP) was drilled successfully, reaching target depth of 2,950 meters. The well encountered oil, condensate and gas from 4 reservoir zones and had 3 successful tests with commercial volumes. During the test well over 7,000 bbl/day oil was produced from the Jurassic section, while the Triassic section had two successful tests with a production of 2 MMscf/day gas, 2,000 boe/day condensate, and 21 MMscf/day gas and 6,000 boe/day condensate, respectively. Based on the preliminary estimations, a significant discovery has been made, the size of which can be justified by the accelerated 2010 appraisal work program. In our other block, in the Kurdistan Region of Iraq (Akri-Bijeel), one exploration well (Bijell-1) was spudded in the first half of December 2009. The first tests have been successful. The well has produced 3,200 bbl/day oil and 0.9 MMcf/day (approx. 150 boe/day) of gas. The 2010 work program includes further deepening of Bijell-1 and the drilling of another exploratory well.

In the Pakistani Tal block we discovered our fourth field, the Maramzai field in 2009. In addition MOL has initiated multiple seismic surveys in its other blocks in the country in order to provide further organic growth opportunities. In the Tal block, a large, 630 sqkm 3D seismic survey has been commenced in September 2009. In the Margala and Margala-North blocks our focus was on processing and interpretation of the newly acquired 875 km 2D seismic - resulting in delineation of very promising drillable prospects within both blocks. In the Karak block location of an exploratory well has been defined after processing and interpretation of 220 km 2D seismic exploratory.

In Kazakhstan after a discovery made in 2008, the Rozh-U-12 appraisal well was spudded in January 2009 on Fedorovsky Block. During the well test 5.4 MMscf/day gas and 1,300 boe/day condensate was produced. Based on the discovery the partners were granted an appraisal license for a 4 years period to evaluate the commercial significance of the field. Trial production of the field is planned in the near future.

In Russia, MOL continued the testing and evaluation of Kvartovoye-11 well on Matjushkinskiy Block in 2009, which gave light oil from the deeper Jurassic and Paleozoic formations, while in Surgut-7 block one exploration well, Atayskaya-2 gave oil from the Jurassic horizon.

In Cameroon and in Oman seismic activities and G&G studies have been performed in 2009, while in India a well-site has been prepared for drilling.

Significant acquisition in the Kurdistan Region of Iraq

In May 2009 MOL acquired 10% stake in Pearl Petroleum Limited and reinforced its current portfolio in the Kurdistan Region of Iraq, where MOL has accumulated excellent knowledge and work experience during the last two years. Pearl Petroleum Company Ltd. is the sole license holder of two giant gas-condensate fields, Khor Mor and Chemchemal, out of which Khor Mor field is under development, already producing and supplying gas to local power plants.

INA’s full consolidation had major effect on our upstream activities

By gaining operative control and fully consolidating INA, the upstream portfolio has been significantly increased in terms of reserve base, production and number of assets, while our position in the CEE region has been markedly strengthened.

According to SPE standards, INA’s reserves amounted to 325.1 MMboe at the end of 2009, while average daily production was approximately 56,600 boe/day in the full year of 2009, out of which crude production amounted to 23,200 bbl/day (down by 5.5% compared to 2008) while gas production was 33,400 boe/day (down by 2.8% compared to 2008).

Croatian onshore activities were focusing on mitigation of natural decline in 2009…

During 2009 Croatian onshore field development operations contained mostly workovers of existing production wells of mature fields to enhance production level and recovery rate.

The implementation of these maintenance activities increased crude oil and condensate production by approx. 340 boe/day, while gas production was increased by approx. 700 boe/day, which only partially mitigated the natural decline of these fields. As a result, average crude oil and condensate production from Croatia was stabilized at 18,000 boe/day (59% crude oil) in the full year of 2009, while the Pannonian basin accounted 54% of total Croatian gas production, resulting in an average gas production of 16,500 boe/day in the full year of 2009 from onshore activities.

To further increase Croatian onshore production, INA considers to apply EOR methods on the Ivanić and Žutica fields, while the Vizvar gas condensate field will be put on stream in the upcoming years in co-operation with MOL.

…while Northern Adriatic offshore production is expected to ramp-up in the forthcoming years

The Northern Adriatic offshore area is covered by three contracts operated by two operating companies. Aiza-Laura and Ivana contract areas are operated by INAgip (50-50% owned by INA). Izabela contract area is operated by EdINA (30% owned by INA).

On Vesna and Irina offshore gas fields well completion activities and installation of gathering system have been finished, while on the Annamaria platform 6 new wells were drilled and completed, with production start-up from two wells in November 2009, which increased gas production by app. 270 boe/day. Besides, drilling activities have been started on Izabela South area as well.

As a result of development activities commenced in 2009, Northern Adriatic gas production increased to 14,100 boe/day (79% from the Northern Adriatic contract area and 21% from the Aiza-Laura contract area).

International production is increasing driven by the development of Syrian Hayan block

In Syrian Hayan block, following six discoveries made over the past five years, and after several successful drilling programs performed in 2009, the second stage of the field development has been finished with the construction of Jihar Oil and Gas Station in Autumn 2009. The capacity of the plant is 6,300 boe/day of oil and 3,900 boe/day of gas. Parallel with the completion of the oil technology, construction of the Gas Treatment Plant (GTP) has been continued, including an LPG Plant which is to be completed by the end of 2011, resulting in further production increase from the field.

In Egypt INA has interests in five concessions out of which four are producing hydrocarbons. On Sidi Rahman Development Lease (East Yidma block) INA is the operator, on the other three concessions INA has non-operating status. INA’s share of production in Egypt was about 2,200 bbl/day in 2009.

In Angola, where INA has interest in offshore Block 3 – covering three production license areas, which produces high quality crude oil– , INA’s share of production amounted to 1,700 bbl/day in average in the full year of 2009.

INA’s CEE exploration activities are mainly pursued in partnerships

INA’s main focus was on joint cross-border projects with MOL in the Drava concession to evaluate the additional hydrocarbon potential of Zalata-Dravica East area, while joint exploration efforts with Eni on the offshore Northern-Adriatic resulted in a non-commercial gas discovery in 2009. To exploit further potential of the Northern Adriatic, in 2009 INA initiated investigation of thin-layer reservoirs based on a gas discovery made in 2008 on the Ika structure. In parallel evaluation of Ivana block’s thin layer upfront gas potential has been initiated as well.

In its international exploration activities INA was focusing on committed programs

In Aphamia block in Syria new 3D seismic survey has been acquired. Based on seismic interpretations and G&G studies three prospects were mapped, location of two wells have been determined.
In Egypt, two exploration wells were drilled in 2009 on East Yidma Concession. Both wells proved oil accumulation in several intervals and have been successfully tested.

In the Angolan 3/05A Concession, one appraisal well has been spudded. Primary zones were perforated and successfully tested.

In the Namibian Zaris block and the Iranian Moghan 2 block reprocessing of 2D seismic data have been performed. Work program in Zaris block has been completed and the project will be terminated. In Moghan block an exploration program has been structured based on the interpretation of reprocessed seismic.

Commitment to efficiency improvement and strong emphasis on long term asset utilization

In cooperation with service companies new seismic processing technologies have been adopted in order to raise the probability of success on geologically complex areas. A significant step was taken on the area of reservoir characterization by introduction of a new model development of fractured reservoirs. Investigations related to the project development of screened EOR/IOR/EGR target fields have been continued.

Implementing the new technological and technical solutions, the geological and engineering preparation of low calorific gas utilization projects has been initiated.

We also progressed on the introduction and implementation of stimulation technologies of unconventional formations. In order to enhance the profitability of our reserves a new program has been launched targeting the adaptation of new lifting technologies. State of the art completion technologies were successfully applied with a success rate above the international average for some high productivity gas wells (gravel packed horizontal wells).

Energy rationalization programs of producing assets generated significant cost savings in 2009.

Sustainable development and HSE have key priority in our operations

We had three major achievements in Hungary in terms of sustainable development in 2009. We have completed a complex process analysis for modernization of produced water treatment and disposal system in Szeged/Algyő region. A consortium was formed at the end of 2009 with the participation of MOL, MERT and MVM to prepare a pre-feasibility study of a possible CCS (Carbon Capture and Storage) project in Hungary aiming to receive an EU subvention for a future demonstration project. MOL also remained active in the so called ECCO (European Value Chain of CO₂) international project, which is subsidized by the EU with 50%.

In our domestic operation MOL Upstream launched several projects both in 2008 and 2009 under „ENRAC”– Energy Rationalization umbrella. Within this framework replacing compressor driving gas motors to electric ones and modernizing steam heating systems in gas technology have been implemented in 2009 resulting in less CO₂ emission and fresh water intake.

In our international activities we significantly increased the level of associated gas utilization in Russia and took several steps towards sustainable and infrastructural development in Pakistan as well.

In addition we also focus on investing in development and retention of our professional staff. Besides introduction of a pilot version of PetroSkills (a professional competency management system) in MOL Upstream, in Pakistan we support talents by awarding 50 scholarships in various disciplines.

Outlook

The difficult economic environment of late 2008 was aggravated further by a broader financial crisis in 2009. However, signs of a modest recovery are already visible in the development of oil prices. As a result of our last year’s strategy that equipped the Group for the tougher climate, MOL has established a strong position for the upturn period. As a consequence we will be capable of implementing most of our last year’s delayed work programs in 2010, while also putting a strong emphasis on exploration activities that can add further impetus to the Group’s growth.

Our main task in 2010 is to maximise the value of our enlarged portfolio, with key focus on high return early cash generation development projects to increase the production level and contribute significantly to Group level EBITDA, while extending MOL’s outstanding efficiency to the whole upstream portfolio and carry out extensive exploration to further increase reserve base. We are committed to maintain our current level of conventional activities in the CEE region by placing more emphasis on partner involvement. Regarding unconventional activity, in 2010 MOL focuses on the highly prospective Derecske tight gas project, where the presence of gas has already been proved in a multi-layered tight reservoir. The international portfolio is optimized by MOL on Group level. In 2010 our key development projects include the Syrian Hayan block and the Adriatic off-shore projects, as well as Pakistani and Russian development projects. All of these projects will have key importance to our upstream performance in the short run. At the same time, our 2010 exploration drilling activity, targeting significant resource potential in the Kurdistan Region of Iraq, Pakistan, Kazakhstan, Egypt, Syria and India, can add further contribution to our long-term growth.

In order to preserve MOL’s leading position and ensure stability of our future activities we plan to implement further efficiency improvements within the joint portfolio.