Ben Aris in London -

What springs to mind if you hear the words "oil and gas"? Most would think of the baking hot deserts in the Middle East or the snow-swept tundra of Siberia. The last thing you probably would think of is a Viennese suburb, home to Sachertorte-eating Austrians. But that is exactly where you will find Europe's oldest nodding donkey, which has been pumping out oil for more than 50 years.

At the beginning of the 20th century, the Austro-Hungarian emperor was the third-largest oil producer in the world and at its peak Austria was producing 2m tonnes a year. Europe is dotted with small, but significant, oil and gas deposits. Because prices have been low and supplies from Russia and the Middle East so plentiful, few of these fields were ever developed.

Until now, that is. Following the fall of the Soviet Union, the economics of small hydrocarbon fields have changed drastically. A raft of small exploration and production (E&P) companies has sprung up to exploit these smaller fields closer to home in recent years. No one in Europe is about to become self sufficient in oil and gas from these oil puddles, but thanks to the growing worries about energy security following the now almost annual Russo-Ukrainian gas row, the appeal of producing home-grown hydrocarbons has increased enormously. Set up in 2002, Aurelian is one of the leaders in this, an E&P company listed on London's Alternative Investment Market (AIM) that is pumping oil in countries across Central Europe.

Nobel business

Azerbaijan's capital Baku was the font of Europe's early oil business, but the first oil was discovered in Central Europe over 800 years ago. The first recorded oil well in the region was drilled in Poland in 1853 and Polish oil used to light street lamps in the big cities across Europe. "Today, there are significant reserves in most of the countries of the region that remain untouched," says Frank Jackson, Aurelian's managing director. "After oil was discovered in Siberia, under the Soviets most of the other fields were simply abandoned. Moreover, as many of these fields are technically challenging, the Soviets blocked the transfer of technology from the West. Interest in developing these resources only reappeared in the early 1990s."

International multinationals all rushed to the false dawn of Russian oil and gas exploration after the Soviet Union collapsed. The Russian state tempted them in with promises of production sharing agreements (PSAs), but few appeared and most companies moved on again to the richer pickings in places like Kazakhstan. What exploration work was done in Central Europe by the communists was crude and didn't amount to more than studying the surface geology to identify the places were oil and gas might be found. "They would find fields and pump them, but then when that well ran dry they would guess where the rest of the oil was and sink more holes. If these came up dry, they would simply move on," says Jackson.

Even today in the suburbs of Vienna there is a 750m-barrel oilfield that has been steadily supplying oil for more than half a century and Jackson says there are similar fields all over the region. More and more of these smaller marginal fields became economically viable when oil prices soared to over $150 per barrel in 2008. Since the crisis hit, prices have fallen back toward $40/barrel, but most analysts concur that once the crisis passes, prices will edge back up again and hit $60-70 by 2010 - still much higher than the $25/barrel long-term average that was the norm only a few years ago.

Aurelian was set up in 2002 with some projects in Romania and Poland; today, it works exclusively in the countries of Central and Southeast Europe that joined the EU in 2003. Three years ago the company's founder Michael Seymour decided he needed more money and took the company on a roadshow ahead of an IPO on London's AIM market in August 2006. "We started the trip in New York in January 2006 and stepped off the plane the day [then president Vladimir] Putin cut off the gas supplies to Ukraine. In the next 36 hours, we raised over $50m from hedge funds. Thank you Mr Putin," says Jackson.

The company eventually raised another $30m at its IPO in London, listing at 55p, but since then the share price has hovered around 40p before being hammered - along with everyone else - in September, falling to 17p as of the middle of January.

Well

Currently, the company's has five small wells in Romania in the foothills of the Carpathian mountains. None are big, but as they are shallow and cheap to drill, "they pay the rent," says Jackson.

But other wells in the region could be real "company-makers." Jackson says another field the company is prospecting in the suburbs of Poznan in Poland could contain as much as 5bn cubic meters (cm) of gas. "There is an estimated 305bn cubic feet of gas in the Polish deposit which will at a stroke increase the country's domestic production of natural gas by 15% and meet nearly a third of the country's demand for gas," says Jackson.

The Poznan deposit was actually discovered by the Polish state in the 1970s, but thanks to the hard rock nature of the geology they couldn't make the gas flow. The fall of the Soviet Union means Aurelian can bring in new technology that simply wasn't available to the communists. The plan is to in effect smash the Poznan rocks underground and make cracks through which the gas can be brought to the surface. "We need to do more exploration, as the Soviets limited themselves to looking at the surface geology, but we think we are in the middle of a very gassy region," says Jackson.

Poland is Aurelian's best prospect, but the company is also working in Bulgaria where there are clearly big gas deposits, but no domestic production. And in Slovakia the company found a hut built on an oil seep, which the owners used to burn in the winter for heating. Oil has been seeping out of the ground for over 100 years and when Aurelian drove a dozen iron bars into the ground needed for the seismological study, four of them came out again covered in oil.

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