MOL GROUP ANNUAL REPORT Economic, social and environmental performance
Kezd§lap
Table of contents
Upstream Overview

Highlights

  • EBITDA excluding special items grew over 20%, driven by international operations
  • In 2011 MOL booked 117 MMboe SPE 2P reserves, which represents more than 200% reserve replacement.
  • The Group’s total SPE 2P reserves were 682 MMboe as of 31 December 2011, while the current best estimates of the unrisked recoverable resource potential is 1.4 Bboe (on working interest basis).
  • In 2012 we are expecting around 121 mboepd hydrocarbon production, without any Syrian contribution.
  • In the Kurdistan Region of Iraq MOL plans to intensify its exploration and appraisal programs in 2012-2013 to fully explore the blocks’ potential.
  • Due to the earlier years’ exploration driven strategy, the reserve replacement rate is expected to reach an average 130% in the next three years.
  • The elevated reserve level will provide a good basis for the estimated 3-4% production increase from 2014.

 

Overview of 2011

 

In 2011 Upstream remained the main driver of operating profit

Strong cash generation of the segment is proved by 21% higher EBITDA excluding special items in 2011. Operating profit excluding special items, increased by 16% compared to 2010. This profit growth derived from the combination of:

  • positive effects of: (1) higher average hydrocarbon production, driven by increased volumes from Syria and (2) higher realised hydrocarbon prices in line with increasing international quotations (26%),
  • which were moderated by negative effects of: (3) Hungarian regulated natural gas price for household customers, with major impact in Q4, (4) slightly weaker USD and (5) higher depreciation due to asset capitalisations in Syria.

Very competitive level of unit OPEX was maintained in 2011 as well

Upstream expenditures, excluding special items, increased by HUF 46 bn to HUF 479 bn. Royalties on Hungarian production of MOL amounted to HUF 102 bn, increased by 14% as a result of increased hydrocarbon prices, which also triggered an automated royalty rate increase to 18% from 12% due to Brent quotation being over USD 90/bbl in 2011. Mining tax and export duty paid in Russia increased by HUF 8 bn to HUF 53 bn. Unit OPEX (excluding DD&A) in 2011 was maintained at a very competitive 6.3 USD/boe in line with our strong efforts to increase overall efficiency.

Higher daily production level due to increased international contribution

Average daily hydrocarbon production increased to 147.4 mboe, by 3%, as a result of higher international gas and condensate production mostly driven by significantly higher Syrian contribution. Pakistani production from Tal Block contributed positively as well.

 

 

Main reasons behind production change:

  • Hungarian hydrocarbon production decreased as a consequence of natural depletion. In 2011, the company fully completed a production-enhancement project in Algy§ to further increase the recovery factor.
  • In 2011, total Croatian production decreased as a result of natural field decline. Offshore gas production decreased by 4% compared to the prior year, due to the delayed start-up of Izabela field (EdINA), where production has not yet commenced. Further decreases were caused by maintenance works on the Aiza Laura Contract Area (INAgip) and by higher water cut and natural decline on the North Adriatic Contract Area (INAgip).
  • Russia:

i.) In Zapadno-Malobalik (ZMB) field, MOL Group’s share of production in 2011 amounted to 10.6 mboepd. Currently, there are 144 production and 77 water injection wells in operation in the field.

ii.) In Matjushkinsky Block production increased to 3.3 mboepd, a 9% rise compared to 2010. This was mainly a consequence of development activities in Severo-Ledovoye field, which continued with the drilling of 25 additional wells. A total of 23 wells were put into production until the end of the year. The necessary expansion of oil treatment facilities and a power generation plant were completed and the further purchase and construction of a 40-km oil transmission pipeline, connecting the central and local oil facilities, began. At the moment, 13 production and 5 injection wells are in operation in Matjushkinsky field; 33 production and 3 injection wells are in operation in Severo-Ledovoye field.

iii.) Production reached 4.8 mboepd in Baitugan field (an increase of 4% compared to 2010). In 2011, a total of 34 oil producer and 2 water injector wells were drilled. In parallel, the installation of remote measuring stations and water injection centres, the building of a water trunk line (fibreglass pipe) and a water injection line (plastic-coated steel pipe), as well as the expansion of power systems were completed in 2011.

  • In Syria’s Hayan Block, gas treatment plant commissioning was performed in line with the scheduled work program, resulting in a significant increase in gas and condensate production and the commencement of LPG production. The Company encountered significant obstacles in the collection of receivables from the Syrian partner for its share of hydrocarbon production in Q4; there has been no significant payment since October 2011. On February 26, 2012 INA delivered the “force majeure” notice to the General Petroleum Company of Syria related to the Production Sharing Agreement for the Hayan Block signed in 1998 and Production Sharing Agreement for the Aphamia Block signed in 2004. Neither INA nor MOL Group do not expect to receive any revenues neither to realize its production share from Syria for the foreseeable future, i.e. until the termination of the “force majeure”.
  • In Pakistan’s Tal Block in the second half of 2011, one new development well (Manzalai-9) was drilled successfully. The Tolanj X-1 well was the sixth independent discovery. Early production of Mami Khel-1 and Maramzai-1 wells are in progress, while the tie-in works of the Makori East-1 discovery to the Makori Early Production Facility are scheduled for early 2012. The drilling of the first appraisal well (Makori East-2) started in July 2011. The processing and interpretation of the 3D seismic acquired in 2010 was carried out successfully, locating two appraisal wells on the Mami Khel and Maramzai structures.

 

Exploration activity in 2011
 

The 3-year average drilling success ratio is 64%

Our intensive exploration activity delivered successes in Kurdistan Region of Iraq, Pakistan, Russia, Egypt and Hungary. In 2011 MOL reached 10 new discoveries worldwide out of the 18 wells tested: 5 discoveries internationally and 5 in Hungary, resulting in a bold 56% drilling success ratio and achieved a 3-year average drilling success ratio of 64%. In Pakistan, 3 wells were drilled and tested, and 2 resulted in discovery; in Kurdistan Region of Iraq, 1 of the 2 tested wells resulted in discovery; in Russia 1 exploratory well was drilled and successfully tested; while in Egypt 1 well of the 2 wells drilled was successful (see details in below table).

 

Significant increase in SPE 2P

MOL Group’s SPE proved plus probable figures are 682 MMboe, which presents an increase of 63 MMboe compared to the previous year. Outstanding, 217% reserve replacement ratio boosted SPE 2P reserves as a results of earlier exploration success in Kazakhstan and extensive field development in Russia.

The annual production of 2011 reduced our gross proved plus probable reserves by 54.1 MMboe (including 0.3 MMboe MMBF Ltd’s production), while the total reserves addition was 117 MMboe.

Changes in the upstream regulatory environment

Upstream: Changes of the Mining royalty framework in Hungary regarding regulated volumes of natural gas

The Mining Act, which regulates the mining royalty regime in Hungary introduced changes from 01.01.2011 as a royalty regime compensation in connection with regulated gas price for eligible customers in Hungary from December 2010. This changes taking into consideration only available volumes from fields put into production before 1998.

MOL paid 39% of its crude oil and natural gas revenue as mining royalty to the Hungarian State on the crude oil and natural gas produced in Hungary in 2011. In 2011, the average rate of the mining royalty payable on natural gas (non inert) produced from fields put into production after 1998 and for crude oil production was 18% (excluding volumes from enhanced oil recovery which represented 13% of oil production and which is subject to a zero royalty rate in Hungary).

As per the bilateral agreement between MOL and the Ministry of Economy and Transport signed in 2005 there were selected fields for which the mining royalty was determined by in accordance with the regulations effective as at end of 2005 combined with a multiplication factor of 1.02-1.05 as per the agreement. As per the September 2010 adjustment to the named agreement the mining royalty of the selected fields shall be calculated in line with the ruling Mining Act and the related by-laws multiplied with 1.02.

Changes in export duty regulation in Russia…

The extraction tax and export duty in Russia is dependent upon the average Urals blend listed prices (Rotterdam and Mediterranean markets) and the Russian Rouble/US Dollar exchange rate and are calculated by the formulas set out in the tax legislation. The tax authorities inform the public of the extraction tax rate through official announcements on a monthly basis. The extraction tax rate as of 31 December 2011 was USD 20.6/bbl; with an annual average extraction tax rate of 19.2%, based upon the annual average Urals blend price in 2011. The export duty rate as of 31 December 2011 was USD 53.6/bbl; with an annual average export duty rate of 51.6%, based upon the annual average Urals blend price in 2011. Favourable regulatory change took place in export duty, with effect from 2011 October: the percentage above the highest threshold has been reduced from 65% to 60%.

…changes in royalty regulation in Croatia

As per the Croatian royalty regulation in effect from 2010, royalty rate was increased to 3.1% in 2010 (for exploitation fields approved by 31 December 2009) and in subsequent years it would have increased year by year by a 0.5%-point per annum rate until 2015, and would have been fixed at 10% for ten years thereafter. Royalty regulation was changed with effect from April 2011, and royalty rate was raised to 5.0%.

 

Upstream outlook
 

Positioning Upstream as a strong growth pillar of the Group

Although Central Europe remains the starting point of the operations, MOL Group already has a well-established presence in the CIS region, strategic partnerships and vital assets in the Middle East, which is a good basis to position Upstream as a strong growth pillar of the group via:

I.) Dynamic exploration strategy, which based on competency based target setting.

  • Most of our existing prospects will be drilled within three years
  • Opening towards higher impact elements, aiming to add furtherelements to the portfolio

II.) Transforming of existing exploration assets to production in the mid-term

III.) Focus on field development with short-term impact

IV.) Active management of the portfolio

  • a geographically and life-cycle-wise
  • Continuous monitoring of inorganic growth opportunities

Unlock value with intensive appraisal program in Kurdistan Region of Iraq

The interests in the Kurdistan Region of Iraq’s Akri-Bijeel and Shaikan Blocks are also of vital importance to MOL Group’s exploration and production activities. These possibly company-making projects can provide huge exploration upside potential in a region of strategic geopolitical importance. Following two major discoveries in the last few years, the projects are currently in the appraisal phase. The work programme in the Kurdistan Region of Iraq includes an intensified exploration and appraisal programme with 2 exploration and 7 appraisal wells planned for 2012-2013. In the Shaikan Block, the appraisal programme is nearing completion and early production is ongoing. In the Akri-Bijeel Block, exploration activities will take place in parallel with the appraisal of the Bijell discovery. The construction of surface facilities for early production in the Akri-Bijeel Block is scheduled for the second half of 2012 with the further assess marketing options.

Production growth potential in short and midterm in Russia

Russia is a core country with short and mid-term production growth potential. 100% exploration success rate was achieved in the last years, while both the Matjushkinsky and Baitex Blocks have sizeable exploration potential with several undrilled prospects. It is expected that MOL will drill yearly 50-60 production and injection wells and yearly 2-3 exploration wells in the next 3 years.

…and in Kazakhstan from 2015

There is further value in Kazakhstan’s Fedorovsky Block, where appraisal activities are underway. The start of production is currently scheduled for 2015. The Group focus both on drilling appraisal wells and development for early production phase. In the next two years MOL plans to drill 3 appraisal wells and test 6 wells.

Pakistan: continuing exploration of the Tal Blocks’ potential

In Pakistan, in the Tal Block the aim is to continue appraisal activity on recent discoveries (Mami Khel, Maramzai, Makori East and Tolanj) and to continue exploration of remaining potential of the block. MOL could increase reserve base and production in the next years with the necessity of increase capacity of the surface facilities to be able to handle growing production. In the Karak Block, as a consequence of the oil discovery in Q4 2011 (1,700 bbl/d; - 100% WI, total consortium share), the work program in 2012-2013 is the tie-in of well to early production and the drilling of one appraisal well.

CEE: maximizing recovery rate

In the CEE region, our aim is to maximize recovery rates and mitigate decline rate. To achieve this goal several oil and recovery enhancement projects are launched from 2012 in Algy§, Üllés and other Hungarian fields. In Hungary, 12 new conventional exploratory wells and 2 unconventional wells will be drilled furthermore  two seismic measurements and several new field developments including efficiency improvement projects will be implemented in 2012. In Croatia, an extensive drilling campaign will start with the drilling of several exploration and development wells on existing oil and gas fields, the implementation of EOR projects will continue, while 3 gas fields will be put into production. The start of the exploration in Romania is expected in the 2012 as well.

Outstanding reserves and production growth is expected in midterm

Due to the earlier years’ exploration driven strategy, the reserve replacement rate is expected to reach an average 130% in the next three years, while the elevated reserve level will provide a good basis for the estimated 3-4% production increase from 2014.

 

 

 


 

 

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