beyondbrics

There may be no obvious link with central Europe but the crisis in Syria is having a knock-on effect in Budapest.

Mol, the Hungarian oil and gas group, said on Friday the turmoil in Syria contributed to the company’s difficulties in the fourth quarter of 2011, when revenues from its Syrian hydrocarbon production were blocked under sanctions applied by the EU.

The effects helped push Mol into a surprise loss of Ft31bn (€107m). Analysts polled by Bloomberg had predicted a net profit of Ft 31.4bn.

In truth, the biggest losses came in the form of some hefty one-off items and weaker downstream revenues. Cash-strapped drivers and hauliers of central Europe – especially in Croatia, where Mol has an important affiliate in the form of INA – are responding to higher fuel prices by driving less and, increasingly, using more fuel-efficient vehicles when they do.

Mol reported an operating loss of Ft88.8bn in refining and marketing including a Ft35bn goodwill write-down at its Italian refinery, IES.

Indeed, it was the upstream segment that brought in the bacon, making a profit of Ft87.4bn in the quarter, 23 per cent up on Q4 2010, despite the loss of Syrian revenues, where Mol inherited its position when it acquired its stake in INA.

“With production of 22,000 barrels [oil equivalent] per day, Syria accounts for something like one seventh of all Mol’s hydrocarbon production. Most of the foreign staff have left, but these wells are still producing, and eventually Mol is entitled to that money. The big question is how and when,” Tamas Pletser, oil and gas analyst with ING Budapest, told beyondbrics.

Still, for Pletser, it is Mol’s downstream segment that is most “worrisome”, given the poor economic situation of central Europe and low refining margins, especially in Croatia, where INA is having a tough time.

There is an unresolved fight between the Croatian authorities and Mol over control of INA, and potential competition from a Russian-owned refinery in Bosnia on the retail market.

“The Croatian market is very weak, and INA’s downstream is making a pretty big loss at the moment, with margins being hammered. They have two refineries there, Rijeka and Sisak, and the latter has a very low margins, and there has always been a debate on whether it should be shut. But of course, local politics are against that,” Pletser says.

Fine, but if Mol can’t fully do what it wants to do in nearby Croatia, and gets caught taking hits on not-too-distant Italian assets, what chance has it got in far-flung, exotic climes like Syria?

And given that it suffered an attack from an armed gang on gas facilities in Pakistan earlier this month, can it manage the risk of expanding exploration and production operations – as it has stated it intends to do – in Russia,  Kazakhstan and Kurdish Iraq?

Hungary’s diplomatic power (and let’s not talk about potential military support)  can hardly compare to, say, that behind the US-based oil giants, should the going get seriously tough.  Admittedly, like other companies, it operates in consortia, where partners can pool their strengths and those based in small countries can hide behind those with more powerful political friends. But, still, it must be tricky making sure your interests are taken into account by, for example,  the US state department.

Pletser, however, says the exploration policy makes sense, stressing that the damage to the Pakistan plant was insignificant, while the potential of the Kurdish fields is “enormous.”

“It’s true Hungary has limited diplomatic clout, but it was one of the first pioneers into Kurdistan. This is more or less virgin territory for exploration, as Saddam Hussein did not want extraction in the area,” he says.

And while the revenue-sharing agreement between the various factions in Iraq may be “fragile”, the potential rewards make Mol’s exploration efforts there fully justified in Pletser’s estimation.

Friday’s results, including the one-off losses, were taken in their stride by the markets. Mol’s shares closed at FT18,895, up 0.5 per cent.

But for the future, Mol must surely think through its foreign ventures very carefully. Not all have made sense – most notably the Italian refinery, which not even Pletser can fathom.

He says: “It’s in Lombardy [so not adjacent to any other Mol operations]. It is a small refinery and Italy has excess refining capacity. It really has no synergies with Mol’s core competencies.”

And even if there are doubts in the market over Italy, there may one day be questions about Mol ventures further afield.

Related reading:
Mol buy-back to cost €1.9bn, FT
Hungary’s Mol: never again, beyondbrics
Croatia: in dispute with Mol, beyondbrics