Sky-high costs, little extraction in the Békés shale gas fields

According to the Ministry of Energy, MVM is already drilling the tenth well in the gas fields of Eastern Hungary. The state company is pouring money into HHE Sarkad Kft., which has had higher expenses than revenue in 2023. The ministry reports that over the past year and a half, they have extracted 100 million cubic meters of shale gas, which would only cover 1.5 days of domestic consumption during the coldest winter period. It’s like one of those “buy one, get two” kind of deals, except you buy two and get one.

Romanian-registered trucks line up on a gravel road. A large torch burns – is it Paris 2024? No, clearly not – it’s a gas station, and it grows larger and larger.

Nearby, a destitute farm indicates that industry has long given up on the area. That is, until 2022, when, just a few kilometres from Sarkadkeresztúr, the state-owned MVM CEEnergy Zrt. began an investment in partnership with a private company aimed at the “exploration, field development, and extraction of unconventional gas fields.”

The investment came against the backdrop of unprecedentedly high gas prices on the stock market after Russian aggression in Ukraine in the summer.

Driving. The gas station looms ever larger, towering now behind some haybales. The area is bustling – new wells are being drilled, with gargantuan machinery humming away.

Huge costs, huge machines, huge project – but little is really known about the endeavour, apart from the fact that it must be Big and Important because it has been labelled a priority investment.

Wells deplete rapidly

 MVM CEEnergy Zrt.’s website reported in December 2023 that, from the first well, drilled in 2022 and put into production in February 2023, and another well that had been drilled in the area years ago but began production in early December 2023, a total of about 37 million cubic meters of natural gas and 42 thousand cubic meters of condensate have been extracted thus far.

What is shale gas?Shale gas is an unconventional form of natural gas, found in shale rock. This is a less-permeable rock formation in comparison to sandstone, siltstone or limestone, which is where conventional gas is found. Shale is generally spread over a larger area, and the gas is trapped in smaller spaces – microfissures – in the rock. Natural gas, as a result, does not flow easily through shale. Shale gas is extracted through hydraulic fracturing, otherwise known as fracking, which seems deep holes drilled into the shale rock and horizontal drilling that allows access to more of the gas.

MVM is conducting the extraction in a joint venture with a 50-50 ownership ratio with Horizont General LLC, a subsidiary of the US-based Aspect Holdings LLC.

The government media was impressed. Fidesz had, by all accounts, discovered the solution to the energy crisis.

Világgazdaság, owned by Lőrinc Mészáros, celebrated: “There could be enough shale gas under Hungary for a hundred years,”

they wrote. Origo reported that “domestic extraction could play a significant role in ensuring the necessary natural gas supply, and they are examining Hungarian shale gas deposits to increase this.”

Hurrah for the future, then – by George, they’ve got it. Naturally, potential negative side effects have been underexplored.

In the Világgazdaság piece, a representative of the Hungarian Federation of Nature Conservation (MTVSZ) stated that “the wells typically deplete after one to two years, so additional drilling is necessary to continue extraction.” Mátyás Molnár, the energy program director at MTVSZ, explained that because of this, “more than one well per square kilometre may be needed, meaning there could be as many as ten wells at a site, which multiplies the negative effects of drilling.”

One such impact is the disproportionately high levels of water usage. According to Molnár: “A fracking operation requires approximately 15 million litres of water, and a single shale gas well may undergo fracking as often as ten times. The amount of water used for a single shale gas well would be sufficient to meet the annual water needs of ten thousand European residents, so it is an extremely water-intensive process that is planned to be applied in a drought-stricken area of the Békés region.”

More funds still needed

The Békés County Government Office issued the environmental permit to HHE Sarkad Kft. The September 2022 document, obtained through a FOIA request, states that two wells and already been drilled on the mining site known as Sarkad I – Hydrocarbon.

“The Mining Company began drilling in December 2021 and, in 2022,” the document writes, “it finished the HHE-Nyékpuszta-6A hydrocarbon well.” It also mentions that one well is 3,702 meters deep, while the other reaches depths of 4,142 meters.

A source noted that the Méhkerék-1 well had been drilled around fifteen years ago – the technology and market prices made extraction uneconomical then. Today’s technology and significantly higher gas prices, however, mean we’re facing a different story now.

According to HHE Sarkad Kft’s report, the company’s revenue reached 12 billion forints (33 million USD) in 2023, while the material costs totalled at 7.1 billion forints (194 million USD) and the services cost 13.7 billion forints (374 million USD) – making cost amount to 20 billion forints (54,6 million USD) in total.

Although the costs far outweighed the revenue, the company still closed the year with a 2.7-billion-forint (7,37 million USD) profit.

All is not well, however – minutes of the shareholder meeting revealed that the decline in daily production over the last four months has caused a drop in revenue and a surge in unplanned costs like the installation of settling and storage tanks to reduce mercury content. The company may need an additional 10 million USD increase in capital to finance the 2024 planned investments.

The funders behind the drilling

Extracted gas over a year and a half enough to cover one and a half days of winter consumption

The two companies, then, would be equally upset at the results thus far. Despite the high costs, it is unlikely that this fracking magic solution will reduce Hungary’s gas dependency in any significant way.

Hungary’s domestic gas production and consumption can be tracked.

FGSZ Zrt confirmed: “In the autumn of 2023, HHE Sarkad Kft began feeding its gas production from Sarkadkeresztúr/Nyékpuszta into the FGSZ system through the ‘0’ entry point at Méhkerék.” Another data set includes individual producers. Domestic gas production has ranged between 6.5 to 8 million cubic meters per day since 2023 fall, while domestic gas consumption was 697,000 cubic meters per hour – 16.7 million cubic meters per day. On a cold winter’s day, this can reach a daily 62 million cubic meters.

According to the source, the Békés gas field supplies 176,000 cubic meters per day. Quick maths – this would cover around 15 minutes of Hungary’s gas consumption on a mild autumn day.

The good news for the stakeholders: condensate from the field is valuable for plastic production and can be sold at a good price. With the drop in gas prices since the 2022 spike – the average gas price fell from 146.1 USD/MWh in 2022 to 43.6 USD/MWh in 2023, and then to an average of 34.9 USD/MWh in 2024 – this is significant.

The Ministry of Energy announced a few days ago: “MVM is drilling its tenth well in the gas fields of eastern Hungary. In the area around Sarkad, Békés County, the drilling of a fourth new well was recently completed, and testing is currently underway. In the coming days, specialists will begin drilling another well. Since February 2023, four wells have been brought into production at the Nyékpuszta site, including one that had been previously drilled. The amount of natural gas extracted has now exceeded 100 million cubic meters, and 135,000 cubic meters of light oil have also been produced.”

When compared to the data on consumption, this seems less impressive. The 100 million cubic meters of extracted gas in 1.5 years would be enough to cover 1.5 days during the coldest months of winter.

FGSZ did not divulge the amount of gas going from the Békés field into the system at Méhkerék. They suggested instead that we contact “the relevant gas production company – HHE Sarkad Kft.”

We reached out to HHE Sarkad Kft and to its state-owned parent company MVM CEEnergy Zrt, but to no avail. The Ministry of Energy was similarly unresponsive. It is a busy season, perhaps.

There’s a light at the end of the tunnel – maybe

The European Parliament’s 2011 study The Impact of Shale Gas and Shale Oil Extraction on the Environment and Human Health doesn’t bode too well. The study states that, “while rates of extraction on conventional gas fields decline at a rate of a few percentage points per year, the rate of shale gas extraction declines by several percentage points on a monthly basis. Some long-term analyses of American shale have shown that the initial production rate is much lower, and the subsequent decline is much steeper than these are with conventional gas fields.

“Production typically declines by 50 to 60% or more in the first year (Cook 2010). In the latest shale formations, like Haynesville, the rate of decline reached 85% in the first year and 40% in the second year. Even after nine years, the decline rate remains at 9%. (Goodrich 2010).”

As a result, the report writes, “It seems that companies operating in Haynesville try to optimize production by extracting gas as quickly as possible.”

The study also notes: “The aggressive development of European shale gas production could contribute only a few percent to Europe’s overall gas production.

Due to the long lead times, it is very likely that production will stagnate at a negligible level for the next 5 to 10 years.”

They continue: “These statements do not rule out the possibility of significant quantities of gas being extracted regionally. Given that environmental restrictions are likely to increase the cost of developments while slowing down progress, European shale gas production will remain almost marginal.”

It must be noted, however, that the study was conducted in 2011. Back then, the EU faced little pressure to look for new energy sources.

Our source notes that hydrofracking is not new tech at all, really – “The first fracking in Hungary took place in 1957 at the Nagylengyel heavy oil field to improve extraction, and since then, more than 2,000 similar fracturing operations have occurred in Hungary without any damage,” they said.

The Nyékpuszta extraction, according to our source, is still in its early stages, but is likely to generate significant additional profit in the future.