Interview: Oil industry, North Sea producers face 'ugly times' before recovery: MOL upstream chief

The upstream oil and gas industry faces "ugly times," with the North Sea likely to come under pressure due to the coronavirus-induced price collapse, but consolidation and recovery eventually emerging, according to Berislav Gaso, upstream executive vice president at Hungary's MOL.

Speaking from Budapest on the recent industry meltdown, which has seen oil prices halve in the course of a month to under $30/b, together with a rout in company share prices, Gaso voiced confidence in MOL's future.

MOL derives 60% of its oil and gas production from Hungary and Croatia, with the UK being its third largest source and additional production from Iraqi Kurdistan and Pakistan. It produced 111,000 b/d of oil equivalent last year.

Since the last oil price crash in 2014 MOL has "consistently and aggressively" focused on cutting costs, said Gaso, who was appointed in 2016 after serving as chief operating officer. The company's latest move in that regard is the purchase, still underway, of Chevron's 9.6% stake in Azerbaijan's ACG oil fields, described by Gaso as a "world-class asset" with an "extremely low" breakeven price and cost base.

MOL is now in a position to break even at $30 oil prices even without additional spending cuts, and can afford to be patient while the toll on demand from coronavirus and accompanying tensions between OPEC and Russia are "sorted out positively," he said.

"I do believe in an upswing. I think it's quite ugly times ahead of us, and we need to get prepared for a longer period of sustained low oil prices... But in the end I think the world will return to normality again. How long that's going to take nobody knows, but I do believe that the industry as such will survive," he said.

MOL "can go on for quite a while in a $30 oil price environment without facing major issues," he added. "You absolutely cannot say the same about any of the independent exploration and production companies listed in London for instance, or many of the other players out there."

MOL's upstream division "is not massively bleeding cash. It's unfortunately also not massively generating cash of course in such a low oil-price environment," he said.

Gaso argued, however, there are already signs of production being taken out of the market, alluding to the indebted US shale industry, with consolidation likely to follow.

NORTH SEA QUESTION MARKS

He admitted to being "pleasantly surprised" by the performance of MOL's UK assets, comprising minority stakes in the Catcher field operated by Premier Oil, which came on stream in 2017, and EnQuest's Scolty/Crathes fields.

MOL entered the North Sea in 2014-15 and produced 22,000 boe/d in UK waters in the fourth quarter 2019. But while it currently only has UK production, Gaso has been skeptical of the country's highly mature offshore industry, and lately MOL has switched focus to Norway and exploration drilling there. It announced its first Norwegian oil and gas discovery this month, after drilling a vertical well and two side-tracks in the central North Sea.

Gaso acknowledged that exploration success might appear of little value in the current crisis, but insisted on a longer-term view. He highlighted the success of newer Norwegian projects such as Equinor's Johan Sverdrup field, which is expected to reach its 440,000 b/d first-phase production target soon.

Over a five-year time horizon MOL's Norwegian exploration "will make sense and will work," he said. "We're not short-term speculators, we're an oil company with many years of tradition," he added, noting MOL plans another Norwegian exploration well this year.

"I do see Norway as the last country standing in terms of hydrocarbon production in Europe and it's a legitimate ambition to be present there if you're an integrated oil and gas company from Europe," he said.

By contrast, a $30 oil price "really makes the UK unattractive" and it could be a rough few years ahead for the country's industry, Gaso said.

"If it's a thing of a year or year-and-a-half, as an industry we'll find a way out, also for the UK. There will be collateral damage, that's pretty clear, there will be consolidation, there will be guys going out of business, there will be lots of things happening, but overall we won't disappear."

M&A OUTLOOK

MOL's current priority is safeguarding its staff and operations against coronavirus, as well as keeping an eye on the health of some of its upstream partners and monitoring the spread of the virus, Gaso said.

It is currently too soon to look for acquisitions, but MOL may eventually seek out opportunities, he said. He said the UK upstream industry had managed to cut costs and regain trust in the aftermath of the 2014 price crash, but more recently, in 2017-19, company stock market valuations had again got out of hand and become "distorted."

"Now is not the time to be a hero. Once we have a fair understanding of where we are — are we ending up in an Italian or in a non-Italian scenario — it's going to be easier to discuss whether that opens up opportunities," he said, referring to the differing impact of coronavirus around Europe.

"The important thing is that we do have a very, very strong balance sheet and we will still maintain very reasonable cash flow generation."