With the latest invitation for tender for concessions by the Hungarian Ministry of National Development announced on 17 June 2014 (2014 Bid Round), Steven Conybeare reviews the outcome of the 2013 Bid Round

The invitation for tender for new oil & gas concessions and geothermal concessions undertaken in Hungary by the Ministry of National Development (2013 Bid Round) closed on 15 November 2013. The results of the 2013 Bid Round were announced on 19 February 2014. So far only MOL has announced that it has signed a concession agreement in respect of one of the oil & gas blocks it was conditionally awarded as well as its subsidiary in respect of the conditionally awarded geothermal block.

As a quick reminder, the 2013 Bid Round provided a new system for awarding concession agreements and, importantly, provided a new framework for evaluating applicants and their bids. Exploration licenses were not made available. The aim was to provide a fair and equal system whereby the submitted technical and financial capabilities of the proposed work programs were compared contemporaneously and the bidder with the most appropriate capabilities chosen. This contrasts with the previous system which effectively worked on a first-come first-served basis.

Winning Bidders of the 2013 Bid Round

The 2013 Bid Round made available 7 blocks in total – 6 for oil & gas exploration and 1 for geothermal.

On 19 February 2014, the government released the results of the 2013 Bid Round, without saying whether each block received more than one bid.

The winning bids were as follows:

• 2 oil & gas blocks were conditionally awarded to MOL, Hungary's largest oil and gas firm.
• 1 oil & gas block was conditionally awarded to new entrant Vermilion Energy Inc. of Canada.
• 1 block was conditionally awarded for geothermal energy to CEGE of Hungary.
  • · 3 oil & gas blocks were not awarded, although we do not know if there were no bids submitted or if none of such bids were accepted, we believe it is the former.

The Concession Agreement

As a brief reminder, the winning bidder has 60 days (with an extension of an additional 60 days) in which to negotiate the concession agreement after which it must establish a concession company in Hungary within 90 days.

The winning bidder must establish and maintain majority control in the concession company (by way of a majority of its shares, business interests and voting rights), which of course affects the risk-sharing model which virtually all industry players adopt.

It still remains to be seen how any farm-out transactions will be negotiated and structured whether under a joint operating agreement (JOA) and/or shareholders agreement applying to the concession company as a joint operating company (JOC) as by default only a minority interest can be farmed out.

To date, only MOL has announced that it has signed a concession agreement in respect of one of its conditionally awarded blocks for oil & gas exploration and production. Central European Geothermal Energy Production or CEGE (a company owned 65% by MOL) also announced that it has signed a concession agreement in respect of the conditionally awarded geothermal block.

Whilst it is clear that that winning bidders and/or the government must have sought an extension to continue negotiations for the one-off additional 60 days, this time limit has now expired so we anticipate that news concerning the outcome of negotiations for the concession agreements in respect of the remaining blocks must be announced soon.

Lessons for the Future

Whilst it is encouraging to learn that a new entrant to Hungary was sufficiently attracted to participate in the 2013 Bid Round, it remains to be seen if it will have been successful in agreeing terms and entering into a concession agreement.

Whilst the new system provided an opportunity for the proper evaluation of technical and financial capabilities of submitted bids, we believe it is fair to say that the 2013 Bid Round cannot be regarded as an overall success.

Only 50% of the offered hydrocarbon blocks received any bids and all indications are that the winning bidders were the only bidders, such that there was no real competition. Without yet knowing if all winning bidders will conclude concession agreements and thus how such arrangements will be structured, it remains to be seen what changes will need to be made to any future bid round.

Industry commentary indicated that the terms of the 2013 Bid Round were unnecessarily restrictive (both fiscally and in terms of the restrictions imposed on the winning bidder and its ability to share risks), which when combined with the relatively low potential of the blocks offered, did nothing to encourage more bidders.

2014 Bid Round

The latest invitation for tender for concessions was announced by the Hungarian Ministry of National Development on 17 June 2014 (2014 Bid Round). This latest bid round again made available 7 areas, comprising 1 block for geothermal (Battonya) and 6 blocks for oil & gas exploration and production (Ebes, Nádudvar, Western Nagylengyel, Eastern Okány, Western-Okány and Újléta).

Despite the industry having provided constructive feedback on the 2013 Bid Round, it seems that the fiscal terms and conditions have been carried over to the 2014 Bid Round, so it is likely that the success of the 2014 Bid Round will further depend on strong positives emerging from the geological studies to be undertaken by potential bidders of the blocks. Only time will tell if the 2014 Bid Round will attract more interest, but we will not find out until 90 days after the closing deadline for submission of bids on either 30 September or 1 October 2014  (as specified in the respective announcements).              

Steven Conybeare is with Conybeare Solicitors,  a boutique international law firm, specialising in cross-border transactions in and around the CEE region, with a focus on the Oil & Gas industry. Steven can be reached at (steven@conybeare.com) on +36 1 577 9936 or +44 870 753 0925