Executive Q&A: The Oil Council talks to Attila Holoda of Hungary's MOL Plc (BDP:MOL)

Attila graduated from Gubkin University of Moscow, Russia in petroleum engineering in 1989. He has an MBA from Budapest University of Economic Sciences as well. He joined MOL (BDP:MOL) as a production engineer in 1989. He worked in different leading positions in production, operational maintenance and investment until 1999. He headed a Hungarian-Kazakh joint venture, and represented at the same time MOL in Atyrau, Kazakhstan between 1994 and 1995. Since 1999 he held different mid and top level managerial positions in the domestic production and exploration. He is responsible for Hungarian and Russian E&P activities of MOL, as managing director of Eurasian E&P. MOL Group is an integrated oil and gas group in Hungary. In addition to Hungary, the company is present in the Europe, the Middle East and Africa region, as also in the CIS countries, with interests in exploration, production, refining, marketing and petrochemicals. MOL Group’s upstream operations expands in Central Europe, the CIS countries, Middle East and North Africa.

Ross Stewart Campbell (RSC) from The Oil Council: Attila thanks for joining us. There are a number of topics that I wanted to discuss with you today but if I may I’d like to start with exploration. As we move into a world where all the ‘easy oil’ has been found, E&P companies are facing a raft of new challenges when looking to find and extract oil and gas in increasingly far flung locations and complex environments. In your opinion what are the biggest exploration challenges facing oil and gas companies and how are MOL planning on overcoming these?

Attila Holoda (AH) from MOL: Ross, the oil industry in the first decade of the 21st century faces a range of new challenges in the replacement of hydrocarbon reserves. In competing for exploration areas, companies have witnessed that the sizes of conventional field discoveries tend to be smaller and smaller, while they are forced to execute work programs and to perform operations in harder and tougher environments.

Two good examples of this phenomenon are the activities carried out in deep or ultra-deep off-shore and arctic conditions. But apart from the climatic and geographical hardships, safety risks are also now increasingly high on the agenda to a certain degree.  Despite intense conventional and unconventional exploratory activities these days, currently 65% of the global crude oil production still comes from fields which have a production history of more than 30 years and are now in a ’mature age’.  As these fields still hide significant potential reserves that can to be produced, the industry gives plenty of room for the implementation of new techniques and technologies, in order to intensify the fields and to improve the efficiency of production from them (Brownfield developments).  

MOL’s upstream portfolio (including INA’s US portfolio which has been fully controlled by MOL since mid-2009) has a solid basis for future growth, with sizeable production in seven countries, and further exploration potential in 15 countries. All these operations leverage off our 70+ year-old E&P experiences gained in the Central-European region.  As one of the largest operators in the region we have introduced and successfully implemented a wide range of enhanced and improved techniques for maturing oil fields in the last 40 years.

For the MOL Group, our main task in the coming few years is to maximise the value of our existing upstream portfolio. Our key focuses are;  

• To progress high-return, early-cash generation development projects in CEE, Syria, Pakistan, Kurdistan and Russia;
• To increase our production levels;
• To contribute significantly to Group-level EBITDA; and
• All while extending MOL’s outstanding efficiency to our whole upstream portfolio.

To help do this we’ll carry out extensive conventional and unconventional exploration to further increase our reserve base. 

RSC: We’ve recently witnessed a record amount of M&A and A&D activity in the oil and gas sector as companies ‘fight’ to acquire new assets needed to fulfil their growth potential.  With this activity burns the age old question of whether companies should focus on organic or inorganic growth to build their reserves base. Is exploration still the ultimate key to growth, or, has M&A overtaken it as the leading factor in building one’s reserves? 

AH: In my opinion Ross, exploration provides a hugely important organic method of value generation for all industry players. But today’s best and quickest opportunities for growth may come from the M&A marketplace. Companies who aligned themselves to ride out the cyclicality of the oil and gas industry are much better positioned to significantly benefit from arising M&A opportunities. For those who can apply rigorous strategies in “contango” years and preserve significant financial resources, there are currently multiple inorganic growth opportunities available at very attractive and hugely discounted prices. If we analyze the last “oil price crisis” at the end of the 1990’s, a significant consolidation process took place based on accumulated and preserved resources, which have been mainly spent right after the bottom of the cycle, providing significant inorganic value generation for those who could survive the crisis. 

RSC: Looking at your global exploration strategy Attila where geographically is MOL focusing on to find new reserves? What particular country (countries) do you view as most opportunistic for future growth? And how large ‘a play’ and part of this strategy is the Eurasia region?  

AH: MOL pursues exploration opportunities in the CEE region, in the Middle East, in Central Asia and in the Northern and Western parts of Africa –altogether in 15 countries.  As our domicile region, Eastern Europe, is relatively explored compared to [e.g.] Western Africa and as such it therefore provides little room to further increase our reserve base.  We are continuously analyzing further opportunities within our other core regions (e.g. Western Africa, Middle East, and Central Asia) to replace reserves at an appropriate risk level.  We enter certain projects on a case-by-case basis, where we see real potential for significant value creation, either by utilizing our knowledge gained in the past 75 years in E&P activities, or, by applying creative financing and structuring alternatives.  

Let me draw you (and your readers) a few examples Ross on our most recent exploration activities: 

1. In Hungary, we implemented a new concept in our exploration activities in 2006, which resulted in an above 70% exploration success ratio [since the initiation of this concept], proving that a mature area can also be important part of an exploration strategy
2. In Russia we had 100% success rate in our exploration activities in 2008, where we utilized the experiences we gained in Hungary
3. We had one of the world’s top 10 discoveries in 2009 (according to Wood Mackenzie) in the Kurdistan region of Iraq, which is one of the most promising regions for growth

RSC: What are your main exploration objectives in the Eurasia region in the short, medium and long-term, and what news flow should the industry look out for later this year and moving into 2011/2012? 

AH: We would like to continue our domestic conventional exploration in our most successful areas but we are becoming more and more focused on several existing unconventional targets (i.e. the Pannonian Basin).   Beside our Hungarian exploration activity we would like to enter other Central-European areas, like the Romanian, Polish and Croatian exploration arenas.  

• In the short-term we want to use our [similar] geographic, geological and infrastructural experiences in Central-Europe here.
• In the medium-term we would like to strengthen our presence in these countries by building up a new asset portfolio.
• Considering long-term objectives we would like to enter in to exploration of the offshore Black Sea, either on the Romanian part, or, on other offshore sections of the sea. We believe that this region of Eurasia is one of the most promising areas to discover considerable hydrocarbon reserves.

RSC: On a similar note what production milestones within the region have you set yourself this year? Are you on track to reach these milestones?

AH: This year we would like to stabilize our domestic production (in essence stop falling production rates).   However our medium-term objective is to slightly increase domestic production by developing current, and near-future, discoveries and start work on some very promising IOR/EOR projects in our more “mature” fields.  As is widely known [and recognized] about MOL we have a strong background in field rejuvenation methodologies; horizontal wells, infill drilling, 3D seismic programs, state of the art geological modeling, methane and CO2 injection, and improved water flooding. Considering the region I do hope that we can reach the pre-mentioned exploration objectives and in addition that we can start production from each of the new discoveries we have made. I believe that we are on track to reach these milestones.  

RSC: I’d like to ask your opinion on four key issues that are currently influencing the mindsets of E&P executives: (i) partnerships, (ii) costs, (iii) technology and (iv) people.  

Starting with partnerships, how is MOL positioning itself to work with other oil and gas companies? Are you looking to work as JV Partners with other IOCs, NOCs and perhaps even independents? What are the opportunities of partnering MOL on new ventures? And are you always looking to retain operatorship and ownership of any new venture?

AH: Forming partnerships and strategic alliances have had a clearly visible effect on the performance of the oil and gas industry. If the NOC–IOC–Service Sector is working well together, the case-by-case oil and gas supply-demand output gaps can be filled in.  It is important to note that in terms of NOC–IOC relationships and partnerships, in MOL’s operations a dual role can be recognized: 

• On one hand, MOL is the custodian of the Hungarian E&P sector; owning more than 50% of acreages in Hungary, and contributing approx. 99% of the country’s production – which is typical to NOCs
• On the other hand MOL is building an international asset portfolio, has a diversified shareholder structure, and as a listed company focuses on shareholder return – of course typical to IOCs
• We utilize this dual role in our partnerships and alliances as well. For example as an NOC, MOL has taken an active role to unlock the potential in unconventional hydrocarbon resources in Hungary with the active participation of ExxonMobil.  
• While as an IOC, MOL is utilizing our ability to develop certain [technically difficult] assets in Pakistan, where the NOC here didn’t have the necessary expertise to develop their assets – our partnership provided both parties significant results. 

In order to exploit the opportunities arising in the currently challenging market environment, we have built up several strategic alliances recently – with OOC, INA, CEZ and other MENA partners. 

RSC: What qualities do MOL look for in a potential partner? And for those companies perhaps looking for new industry partners, what can MOL bring to the table that the industry should be more aware of? 

AH: MOL has been creating partnerships in the past few years along two different models.   In unconventional plays, we seek experienced and financially robust partners, while in our conventional plays, where exploration was extended to smaller prospects close to known accumulations, we teamed up with other industry players contributing a different approach with special regional know-how.   This approach has helped us decrease industry-specific risks in our unconventional plays. Our exceptional success rate in the CCE region in the past couple of years is a clear sign that this was the right approach to take.   As a Group we have a legacy of over 70 years in oil and gas E&P and in developing partnerships since the end of the 1990s. Our experts have proven their skills in many projects around the globe.   The key to their success was the combination of high quality performance with the understanding for our partners’ culture and needs.  

RSC: For many companies last year was about streamlining their businesses and reducing costs wherever possible. How can E&P companies look to reduce their costs without losing their competitive edge and effectiveness? Are their some examples from within MOL you could share with us? 

AH: At times of crisis major oil companies used to regard the closure of weaker fields almost as the only solution.  In reality, writing off and liquidating human resources are such steps whose reinstatement costs cannot, or can fully, be assessed accurately (fundamentally for the time required for reinstatement). In our endeavour not only to sustain but to develop the machines and devices that we use, we fight against their depreciation and their replacement through accurately planned accounting rules, planned refurbishment and renewal.   Likewise, money and energy need to be (re)invested to renew our most important human resources, since such technical and technological challenges, such as developing and adopting EOR/IOR techniques, or, exploring and exploiting the reserves in operation, are impossible to resolve without them! 

Technically responsible and financially accountable managers; experts who often possess specialised knowledge; background workers; and technicians; all play a similarly important role in (i) the efficient operation of technological systems and (ii) helping to breed the talents of a new generation who themselves bring new, fresh ideas, as well as, new paradigms.  Together with the maintenance personnel dedicated to the given technological area, operators have a joint responsibility to run the process systems, the existing technical devices, machines and equipment at a constant optimum.  

One staff member complements the other. They must not only intend to fulfil the responsibility they have taken, or the joint necessity they have to operate the field, but strive to sustain [and even develop] their personal existential status.   Personnel, unified in this sense, who breathe together with the technological systems they run, are profoundly knowledgeable about each element of the process. Practice from daily operations, gaining experiences and developing skills will allow them to filter out the inevitably inherent but superfluous elements in our systems, and to discover the optimisation potentials, to the smallest details, of all technological processes.  

Thus, a manager’s responsibility is not only to track the realisation of a business plan – prepared with the help of a well-established planning method called Zero Based Budgeting (or ZBB), i.e. an operation case-map designed to the minute detail at asset and service level, with a constant and continuous engineering and cost-centre control – but also to involve to the highest possible degree the operators’ staff into the continuous process optimisation. 

RSC: Moving the discussion onto technology Attila, in the past few years a wave of innovative technology has emerged that is now allowing E&P companies to operate successfully in previously uneconomical and/or inaccessible oil and gas plays. How large a factor will technology be for tomorrow’s E&P companies?  

AH: Generally technology can create a massive competitive advantage over those companies that are behind the cutting edge of technology. Nevertheless this competitive advantage can be perceived from at least two perspectives.  Firstly that companies who use less sophisticated technology in areas that are accessible to most of their competition are in a less favourable position than companies who can apply state of the art of technologies.   Here the competitive advantage seems to be very straightforward, like the Olympic motto ‘Citius, Altius, Fortius’, which in this case means that a certain exploration project can be accomplished faster, cheaper and more efficiently than those that are run on has-been kind of technologies. Secondly that companies who work in areas that are only accessible to high-level technology.  

In this case new technology is instrumental in achieving any success. If a company does not have such technologies their efforts will be in vain, and it can be concluded that technology is an essential part of the game and its lack forms a barrier to success. Suffice to think about the success ratio of exploration ops focusing on unconventional plays. State of the art technologies, especially a series of technologies logically built along the line of information acquisition and interpretation can provide a considerable amount of competitive advantage in decision making and profit realization with companies that are in a position to apply them.

Professionals who have the privilege to be responsible for developing or implementing state of the art technologies also bear the responsibility for making their company’s decision makers aware of the advantages and the risks of the technology. This includes the risks that might come from the inappropriate application of the technology and losing control over its budget. Well-trained experts and state of the art technology go hand in hand. If any of these two prerequisites for success are missing then failure becomes inherent in the system.  Competition makes it compulsory for every economic performer to enhance efficiency. Change and innovation are essential in improving competitiveness.  

RSC: Moving finally onto people – many large oil and gas companies are struggling to secure skilled talent and we’re already seeing a [growing] shortfall of skilled personal within the industry (particularly engineers and geologists).  Are we, as an industry, heading towards a ‘skills/talent crunch’? How is MOL looking to capture and retain skilled E&P staff (both in management and in operations)? 

AH: As I touched on earlier trained managers, skilled experts and technicians all play an important role in the efficient operation of technological systems and continuous improvement. To retain them is crucial and a critical factor of the future success of any E&P company.  Nowadays the war for talent has become really very aggressive. In this situation our managerial responsibility is to offer our staff a long-term professional career opportunity with personal and professional development.   All companies should be aware at all times of the corporate capabilities and expert skills they need to meet their own strategic goals.  For this aim we worked out and implemented a transparent and controllable performance evaluation system based around a continuous capability matrix which incorporated a career management system for each member of our staff. It is highly important to harmonize the personal futures of your staff (including benefits, packages, trainings, professionals or managerial careers) with your company’s own fortune making them aligned to common success as much as possible. 

RSC: If I may Attila I’ll wrap up by asking your one-word opinion (bullish, bearish or uncertain) on the future of the following. Bullish, Bearish or Uncertain?  

RSC: China? 

AH: Bullish 

RSC: Russia? 

AH: Uncertain 

RSC: Oil at $100 before the end of 2010? 

AH: Bearish 

RSC: Attila, thank you very much for your time and your thoughts. We wish you and the team all the very best in reaching your goals.