MOL Group’s diverse upstream portfolio includes a number of assets, covering production in 7 countries as well as further exploration possibilities in 13 countries. In 2010 the Central and Eastern European (CEE) region remained MOL’s core area, with a production increase in the Adriatic offshore overbalancing the natural depletion of onshore fields in Hungary and Croatia. MOL’s strong cash-generation position in the CEE region is supported by rising production levels from Syrian and Pakistani assets. On the international arena, Kurdistan Region of Iraq and Russia remain vital pillars of MOL’s upstream activity, ensured by recent discoveries and field development activities.

Competitive advantage

MOL Group is without a doubt in a strategic position, both in terms of its geographic position as well as in terms of its upstream know-how. Its location at the heart of Central Europe, along with more than seven decades of oil and gas industry experience, contribute to its role as a key regional energy player. MOL Group’s remarkable exploration success rate of 70% in 2010 (14 discoveries out of the total 20 tested exploration wells) has once again won international acclaim, and its ability to ensure cost-efficient operations has been particularly important in light of the downturn in the global business environment in recent years. As a right sized company, MOL is able to react swiftly to changes, while it is also large enough to offer host countries a sense of stability. The above mentioned factors as well as its team of highly qualified experts put MOL Group in a prime position to maintain its leading role in the CEE region and to strengthen the company’s international standing.
 

Production

Consistent production levels in CEE, with offshore output contributing to an increase in Croatian production

Hungary and Croatia significantly contributed to the production level of MOL Group with their results of 53.6 mboepd and 54.1 mboepd respectively. Hungarian production was slightly lower than last year; however, the results from the major producing areas were in line with previous forecasts. In Croatia we experienced an 11% increase compared to the previous year (considering 2009 full-year data for INA). In Hungary the production distribution was the following: 13.4 mboepd of crude oil, 6.0 mboepd of condensate, along with 34.3 mboepd of natural gas.
MOL Group was able to maintain its advantage in extraction efficiency in Hungary. In 2010 the Algyő oil recovery enhancement project was started and is scheduled to finish in 2011. Five new gas production wells will be operated within the scope of the South Békés project, which will be completed in 2011. Rationalisation projects such as Algyő and Szank remained on track with potential implementation closure in 2011. In addition, to extend our current partnerships in CEE, during 2010 MOL agreed to initiate field redevelopment and rehabilitation projects.
Within the Croatian total production, crude oil accounted for approximately 9.7 mboepd, condensate output was 6.8 mboepd while gas output reached 37.6 mboepd. Despite ongoing workovers and the utilisation of EOR methods on mature onshore fields to enhance production levels, natural gas production levels fell to 14.9 mboepd in onshore Croatia. This decrease was offset by a 61% increase in offshore output (compared to 2009, considering full-year data), thus reaching a rate of 22.7 mboepd in 2010, compared to 14.1 mboepd in 2009 (considering full-year data). The rise in offshore production is in line with company forecasts, and came from the higher share in the North Adriatic Contract Area (NACA), as well as from the ramping up of production. NACA accounted for 84% of offshore gas production, whereas 16% of the output came from the Aiza-Laura contract area.
In 2010 MOL put further emphasis on the application of EOR/IOR methods to improve production. Following the identification of 30 potential fields, preparatory works commenced to exploit further potential from the fields.

Steady production from Russian fields

In Russia’s Zapadno-Malobalik (ZMB) field the 50% MOL share production contributed with 12.0 mboepd to Group results. The 2010 investment activity continued with the two projects already started in 2009 via the drilling of new wells to moderate natural production decline and the implementation of a gas utilisation program in compliance with license terms. The construction of a gas turbine power station is making good progress: five generators were already put into operation before the end of 2010.
In Baitugan field production increased by 51% to 4.6 mboepd, as a result of the continued development program. A total of 34 production wells and 5 water injection wells were drilled in 2010; meanwhile, the reconstruction and extension of gathering, water injection, power supply systems and the central processing station were ongoing. Moreover, the preparation of a new field development plan was started based on the 3D seismic acquired in 2008.
In the West Siberian Matjushkinsky Block, the development of Severo-Ledovoye field was continued with the drilling of 5 additional wells. On Kvartovoye structure one well was drilled and tested. Production increased to 3.0 mboepd, a 48% rise compared to 2009. Currently there are 11 production and 6 injection wells in Matjushkinsky field; these figures are respectively 12 and 2 in Severo-Ledovoye field.

Syria and Pakistan accounting for a growing share of output

Following six discoveries over the past five years, and after several successful drilling programs undertaken in 2009, the second stage of field development of Syria’s Hayan Block was finished with the construction of Jihar Oil and Gas Station (OGS). In 2009 the start-up of OGS significantly exceeded expectations in terms of production volumes; furthermore, a Gas Treatment Plant also started to operate at the end of 2010. Hence, INA’s share of gas production reached a total of 4.4 mboepd in 2010 (a rise of 62% compared to 2009 full-year data), while oil and condensate production amounted to 3.5 mboepd (exceeding 2009 full-year volumes by 148%).
During 2010, through the operatorship of all its blocks, MOL further strengthened its position in Pakistan with the consortium’s 7-8% contribution to the country’s overall gas supply. In the first half of the year, two development wells (Manzalai-8 and Makori-3) were drilled on Tal Block. MOL’s share of production from Tal Block in 2010 amounted to 4.2 mboepd of gas and 0.5 mboepd of condensate from 10 producing wells.

Further production projects bring sound results

In Egypt, INA has interests in 4 hydrocarbon concessions. INA serves as the operator on the Sidi Rahman and the Rizk Development Leases in the East Yidma concession, while it has non-operator status in other concessions. 2010 investment activity primarily focused on the drilling of 5 oil producing wells. INA’s share of production in Egypt was around 1.9 mboepd in 2010.
Angolan production contributed to Group results with a production of 1.6 mboepd from three non-operated offshore blocks. In 2010 the activity was focused on drilling 2 oil producing wells, out of which one was put into production already in 2010.

Exploration

CEE still boasts an exceptional exploration success rate

MOL’s exploration activity in Hungary achieved a 70% success ratio in 2010: 10 exploratory wells were completed and tested in Hungary, out of which 7 encountered commercial quantities of hydrocarbons*.  This excellent success ratio justifies our strategic decision to extend our exploration towards smaller geologic prospects with lower technical risks, close to known hydrocarbon accumulations. The new discoveries made in 2010 added 4.1 MMboe to our SPE 2P reserves base.
Partnerships in MOL’s Hungarian exploration activity played a significant role. MOL drilled and completed two wells on the Darvas-Komádi license area in partnership with Hungarian Horizon Energy. Within the framework of MOL’s partnership with Ascent Resources in southwest Hungary, the second phase of Lovászi-Petisovci 3D seismic was acquired with the aim of revitalising one of the oldest exploration areas in Hungary. Moreover, 3D seismic acquisition was also completed in the Kunmaradas area.
INA successfully continued the exploration of the Sava Basin in onshore Croatia, where a satellite oil and gas field was discovered. In the Drava Basin, Dravica-1 well test was completed with success. In order to further explore the offshore Northern Adriatic area, INA and Eni as partners investigated the potential of the thin-layered reservoirs of the Ivana contract area.

* One well, Okány-3 was drilled in 2009 and classified as a commercial discovery in 2010.
 

Strenghtening our position in CEE by the entrance into a new country

In July 2010, the Romanian National Agency for Mineral Resources announced that MOL (70%) and its Romanian partner, Expert Petroleum (30%) were awarded licenses for three blocks they bid for in the 10th Romanian Licensing Round. The three blocks, located in Western Romania’s Pannonian Basin, cover an area of 3,434 sqkm. The signing of the Concession Agreements is set for 2011, as is the start of the first working phase of the exploration program. 

 

Unconventional exploration in the CEE region

The focus of unconventional exploration in 2010 shifted towards the Derecske Basin. MOL continued the unconventional exploration program by drilling two unconventional wells; results have proved the presence of hydrocarbons. With regards to the Békés area, the competent authority approved the final report of MOL’s license in the basin, which ensures the grant of the necessary license for further exploration. In this MOL operated an unconventional well already in 2009, which proved the elements of the play as well as the presence of gas. The evaluation of unconventional gas potential in the Croatian-Hungarian crossborder area was completed, where the Drava Basin was singled out as the most promising for further exploration. The testing of tight gas sands and gas shales by means of drilling deep pilot wells is proposed to be carried out with partner involvement. A number of small scale unconventional oil and gas prospects have also been introduced into the Croatian prospect portfolio: these projects are in the vicinity of producing fields.

Kurdistan Region of Iraq is our flagship in terms of exploration

In Kurdistan Region of Iraq’s Akri-Bijeel Block (MOL’s undiluted share is 80%), the first exploration well (Bijell-1) was completed in November 2010, reaching its total depth, followed by several successful well tests resulting in 3.7 mboepd oil and 0.1 mboepd gas production without the use of any intensification methods (such as acidisation or fracturing). A discovery announcement was made followed by entering into the second phase of exploration, and preparations for the appraisal of the accumulation.
In Shaikan Block (MOL’s undiluted share is 20% and the block is operated by Gulf Keystone Petroleum International Ltd), the work program of the appraisal phase was continued with the acquisition of 3D seismic, which ended in November 2010. The Shaikan-3 shallow well was drilled to productive Jurassic formations; after repetitive acid treatment, the well produced significant amounts (9.8 mboepd) of heavy oil. In November 2010, the Shaikan-2 appraisal well was spudded. The surface facility for the extended well test of Shaikan-1 was built, while three zones were tested in the Shaikan-1 discovery well reaching total production capacity over 7.5 mboepd.

Other projects in the Middle East region

Additional 2D seismic data was recorded in Oman’s 43B block during 2010 in order to acquire sufficient reliable information for choosing the optimal location for an exploratory well to be spud the following year.

In Syria, INA entered the second extension of the initial exploration phase on Aphamia Block. Two exploration wells were drilled, the results of which confirmed the hydrocarbon saturation of the structures. Positive test results at one of the wells encouraged further exploration activities; while the other one is waiting for testing.

CIS region has a substantial role in our future reserves replacement

In Russia our exploration activity was focused on Matjushkinsky and Surgut-7 Blocks. On Matjushkinsky Block, on Verkhne-Laryegan structure preparation works for exploratory drilling were started. On Surgut-7 Block, a stimulation program for the 2 discoveries made over the previous years began in 2010, including hydrofracturing activities at the first discovery well.

As a result of exploration successes, the Ministry of Energy and Mineral Resources in Kazakhstan approved the extension of the Exploration License for the appraisal and trial production of the Rozhkovsky area for a period of 4 years, in order to evaluate the commercial significance of the field and to conduct further exploration activity. As part of the appraisal program, the Rozhkovsky U-21 well was spudded in October 2010, showing promising levels of hydrocarbon saturation.

Additional exploration potential in Pakistan

In Pakistan, exploration and appraisal activities within the highly promising Tal Block were successfully continued. In the second half of 2010 two exploration wells were spudded and Makori-East-1 was announced as Tal Block’s fifth gas and condensate discovery. The successful result of Tolanj X-1 well was published in February 2011 as the sixth discovery. The drilling shall be continued to penetrate and test the deeper horizons. In the Margala Block, Margala-1 exploration well was plugged and suspended in Q1 2011 without encountering the target formation. Although a reservoir of adequate quality at reasonable depth was not found, drilling nevertheless showed indications of hydrocarbons. The way forward for Margala Blocks is to carry out a detailed post-drilling evaluation in order to fully assess the potential of both Margala and Margala-North Blocks.

In the neighbourhood of Pakistan, in India’s Himalayan Foothills, the Kasauli-1 well on the HF-ONN-2001/1 Block was spudded in March 2010 and is expected to reach the target depth in 2011.

The African portfolio is under exploration in line with committed work programs

One exploration well was drilled on the East Yidma concession in Egypt, and it encountered a non-commercial oil accumulation. Furthermore, an oil discovery was made by the Rawda East-1 exploration well on the North Bahariya concession, while Rawda North-1, drilled on the same concession, was dry and consequently plugged and abandoned. In Cameroon, G&G studies and 2D seismic activity were undertaken in 2010. In Angola, an exploratory well was drilled on the 3/05A concession, finding gas reservoirs at two levels. However, it was not commercial due to the lack of Angolan offshore gas infrastructure, thus partners agreed to plug and abandon the well. INA received declarations of commercial discoveries for two Angolan fields, Punja and Caco/Gazela (discovered in prior decades). In Namibia, INA’s exploration license expired in November 2010. 
 

Other

Sustainable development (SD) and Health-Safety-Environment (HSE) remain a fundamental priority

In 2010, the Upstream HSE Management System has been elaborated and introduced, providing a comprehensive tool for high-level HSE performance. With regards to INA necessary actions to be taken related to integrated SD & HSE governance were identified and set.
In Pakistan, social programs such as MOL’s scholarship program or the Free Eye Clinic continued, as did our road rehabilitation efforts. MOL provided help for inhabitants affected by the Pakistani floods, delivering a total of 12 trucks of food and relief items (such as tents and medicines), thus supporting over 700 families.
In addition, MOL undertook a Talent Program aiming to increase appointed professionals’ skills. This is the first international upstream program covering Croatia, Russia and Pakistan.
INA joined MOL’s upstream division in the Petroskills pilot project, establishing a professional competency management system with the involvement of around 150 employees.

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

During 2010 costs optimisation remained in focus, which was supported by Group level portfolio optimisation and harmonisation of procurement processes. With the aim of maximising the Group’s efficiency, minimising risk and uncertainty but still maintaining the quality of exploration work, several improvements were carried out in 2010. Software acquisitions with professional training in basin modelling and seismic sequence stratigraphy permit state-of-the-art analysis of the evolution of hydrocarbon accumulations. In addition, the implementation of an advanced data gathering and analysis software guarantees efficient data handling and capturing for drilling and workover operations. Its compatibility into the engineer’s desktop system and therefore integrated workflow not only saves time but adds value to drilling, completion and production engineering teams as well. New reservoir characterisation methods (high resolution micro CT), formation damage control and production enhancement techniques have been developed by MOL R&D and E&P divisions in cooperation with service companies to ensure the most appropriate IOR/EOR technology and unconventional hydrocarbon reservoir field development designs.
Significant cost savings could be expected in the near future because of the strategic focus on the energy rationalisation program of producing assets; efficiency improving equipment (such as waste heat recoveries, electric power plants for waste gas) have been tendered and purchased.
The potential application of electromagnetic methods (CSEM) on existing exploration blocks has also been investigated. New seismic processing developments as well as reservoir modelling techniques have been applied, thus improving understanding of complex geological environments. The evaluation of surface geochemical imaging methods and high resolution crosswell seismic were launched.

Outlook

As a result of the global financial crisis, which started back in 2008, MOL Group decided to review its existing strategic guidelines with regards to exploration and production. It set out on a program to rationalise its portfolio and expenditures, while in 2010 the Group identified exploration-focused growth as a further means of ensuring long term success.
In order to optimise our portfolio on a Group level, we fully harmonise our project and portfolio management control. MOL and INA management ensures our ability to achieve maximal value creation on a Group level within the fields of exploration and production.
In recent years, MOL has achieved sound results in terms of exploration, and MOL’s accomplishments have already received international acclaim. The Group has also proved its operational excellence in Syria and Pakistan and in the coming years it aims to utilise these experiences effectively. Therefore, a competency driven approach will provide a stable basis for our operations and growth.
In the near future we are targeting to transform our exploration success into production and regarding field development projects, MOL plans to maximise the value of its existing portfolio, focusing on the short term impact of production.
In light of the current global economic environment, it is in MOL Group’s interest to retain its upstream-focused service companies (Crosco, GES, Geoinform, Rotary) and coordinate their activities within a joint strategy. In order to achieve this goal, MOL’s harmonised business development prioritises the inclusion of our service companies in all countries where the Group is present.
During the next period MOL aims to strengthen its international presence, in part through forming new alliances as well as by deepening already existing partnerships and through active portfolio development. On the long term, MOL plans to keep its position as a key regional energy player while simultaneously becoming a global benchmark for upstream excellence.

annual report 2010