XOM senses the start of something big in Hungary

Implications: Exxon Mobil (XOM) located in Irving, Texas reported in a press release of April 10 that its affiliate Esso Exploration International signed a production and development agreement with a Falcon Oil and Gas Ltd. subsidiary to begin a phased program on a 184,300 acre contract area in the Mako Trough of southeast Hungary. XOM will have a 67% interest and will be the operator. XOM will test existing well bores and possibly drill additional wells to evaluate the commercial production of unconventional natural gas and liquids. The company plans to invest $75 million in the initial phase, to begin this year. The agreement includes options for XOM to proceed with an appraisal and development program. Elwyn Griffiths, vice president of Exxon Mobil Exploration Company noted that a wide variety of opportunities gives the company the ability to provide affordable energy solutions on a worldwide basis.

Analysis:  Falcon Oil and Gas (Vancouver, B.C.) began drilling a seven well exploratory program on this license in 2006. It is located in the Pannonian basin of southeastern Hungary. Falcon has characterized the play as similar to the Pinedale anticline in Wyoming’s greater Green River region. The Scotia Group in Dallas has estimated a theoretical potential recovery from the Mako Trough as high as 96 trillion cubic feet. This is greater than the proved natural gas reserves in Texas. By year-end 2006, Falcon revealed that six wells had promising shows. The license area is south of the city of Szolnok and is adjacent to the Romania/Montenegro frontier. Natural gas has been discovered in several regions of Hungary and is part of the MOL portfolio of producing properties. MOL is associated with Gazprom in some projects and it currently the subject of a takeover bid by OMV, the Austrian natural gas company which also has ties to Gazprom. A significant natural gas development would put XOM into competition with Gazprom for natural gas sales in eastern Europe and would be a plus for the European Union’s desire to broaden participation in the EU energy market. Seen in this light, it could be an important move by XOM and one which could have a high profit potential when considered in the well-advertised (and unpopular) pricing plans of Gazprom for future years.