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Madagascar: a new, unconventional-oil frontier

Aim-listed Madagascar Oil targets 87,500 b/d production; seeks partners for more developments

MADAGASCAR Oil hopes its debut on London’s Alternative Investment Market will pave the way for the rapid commercialisation of its heavy-oil and oil-sands acreage in western Madagascar.

The company took a significant step towards developing its Tsimiroro heavy-oil field when it raised £50.5m ($78.8m) from the sale of 26.75% of its shares on 29 November. Most of the funds will be invested in a pilot steam-flood project, intended to establish the best way to exploit the resources. That is scheduled to become operational in late 2011 and if it produces positive results, the aim is to start commercial production by around 2016.

“We have a very strong economic case,” says John Laurie Hunter, Madagascar Oil’s chairman and chief executive. The next phase of the project is intended to establish how best to execute the project, rather than whether the reserves make it viable. Hunter says that, allowing for the $1.0bn-1.5bn of upfront investment, the project would break even at under $50 a barrel, well beneath prevailing crude prices.

While the area’s heavy-oil reserves have long been recognised – the oil seeps up to the surface in some places – previous explorers have failed to find sufficient reserves to make production worthwhile. Madagascar Oil’s discoveries since 2004, in five contiguous blocks in western Madagascar covering 29,500 square km, have changed this.

The company says the “best estimate” of reserves in Tsimiroro amount to 0.965bn barrels of heavy oil in known structures, and more than 0.78bn barrels of potential in adjacent structures on the block. The company says it has found oil in 16 out of 19 wells it has drilled so far this year.

Based on the lower figure, it says production could average 87,500 barrels a day (b/d) for 30-40 years, if commercial recovery is proved. “If we could raise production to 150,000 b/d, we would be well in the top five steam-flood [projects] in the world,” Hunter says.

Madagascar Oil also retains a 40% stake in the nearby Bemolanga bitumen block, having sold 60% and the operatorship to Total in 2008 for $100m – an agreement that included another $100m of Total’s cash to develop the play. A decision on whether, or how, to proceed with that project is due by end-June 2011.

Bemolanga has “best estimate” bitumen reserves of 1.179bn barrels, with a “potential upside” of more than 1bn barrels more, according to Madagascar Oil. While the reserves are present in the rock in a lower density than in Canada’s Athabasca oil sands, the oil is said to be of higher quality and easier to separate from the particles.

Developing the Bemolanga resource would be on a different scale to Tsimiroro, requiring some $8bn-10bn of upfront investment. But Madagascar Oil is unlikely to be going it alone on Tsimiroro either. The $1bn-plus upfront costs would be beyond a company of its modest size. “The best return for our shareholders would be a partnership, or sale to someone with a much lower cost of capital,” says Hunter.

The company’s ability to attract a big partner may depend on more than the project’s commercial viability. Madagascar’s recent history has been plagued by political unrest, which bubbled up again in an attempted coup in mid-November by 20 army officers. That seems to have come to nothing, but President Andry Rajoelina still remains in a precarious position.

He ousted his predecessor Marc Ravalomanana in 2009 after a protracted power struggle in a move regarded by some countries as unconstitutional. As a result, the US administration terminated trade benefits for Madagascar in December 2009, while the African Union imposed sanctions on Rajoelina earlier this year.

Hunter remains sanguine, noting that the situation on the island is likely to be different by 2016, when the oil could start flowing. In fact, international resources companies, such as miners and loggers, have been making steady incursions into the country, often on lucrative terms, as the government desperately seeks funds.

Hunter insists the terms agreed with the government are fair, though some Malagasy non-governmental organisations say they are too generous to the company. “The end result is the Madagascar government making the majority of the profit on potential projects with no requirement for project funding,” Madagascar Oil says.

Environmental issues may also be problematic for both projects, given the scarring caused by heavy oil and tar-sands projects and the efforts being made to promote Madagascar as an eco-tourism destination. The company says the blocks are not close to areas being developed for eco-tourism, but local environmental groups are already questioning the wisdom of the developments.

The hefty amount of power consumed by the projects is unlikely to be environmentally friendly either. In the absence of alternative feedstocks, they will need to burn some of the oil they produce. For the steam-flood operation, that will probably involve using about 20% of the oil produced as fuel. How or whether carbon emissions from power plants involved will be ameliorated remains unclear.

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