Regional Energy Market

The Board has identified Central Europe as an ideal environment in which to develop and grow Wildhorse as it seeks to become a major supplier of UCG syngas to power stations in the region. Authorities in the region are supportive of investment into domestic energy production as energy security continues to be a growing concern for all governments in the region.

Procuring a consistent and cost effective energy supply in Central Europe is vital due to the region’s current reliance on Russian gas imports. These issues have been highlighted by the Ukraine/Russian disputes which affected gas supply across Europe. As can be seen in Figure 1, approximately 78% of all gas consumed in Hungary in 2009 was imported from Russia (source: KPMG). Similar gas import scenarios are also experienced by many other countries in the region including Poland (90%), the Czech Republic (73%), Slovakia (77%) and Romania (100%).

Figure 1

A KPMG 25 year gas price projections market study commissioned in February 2010 by Wildhorse and Dalkia and its Hungarian affiliate, PannonPower Holding Zrt., found that positive pricing trends are expected to continue.

Source: KPMG Independent Electricity and Gas Market Study for Hungary (February 2010)

Main Assumptions

Imports are expected to remain dominant; therefore long-term gas supply contracts will keep determining gas supply in Hungary. In the long run, Hungary could choose an alternative supplier, therefore the conditions of the Gazprom contract would be modified in 2015 to contain a convergence mechanism to cost plus based prices.

Gas price forecasting methodology

Core gas price

On the basis of production cost data from various European countries, a benchmark average gas production cost was determined. The evolution of the production cost was determined according to the Energy Information Administration’s forecast on gas production cost increase. The Euro Producer Price Index was the forecasted HUF/EUR exchange rate were taken into consideration when determining the final producer price. A 10% producer margin was also included in the producer price. For the estimation of transportation costs, a transit distance of 6,000 km was assumed. A transit margin of 10% on the basis of investment costs was included in the transit fee. When the cost plus basis was determined, a convergence mechanism was calculated from the year 2015, which gradually steers the forecasted price from the level of the Gazprom formula price (used in Scenario 1) to the level of the cost plus price. This resulted in the core gas price. A 10% gas trader margin was assumed on top of the core gas price to arrive at the final core gas price.