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Madagascar heavy-oil project stalled

Madagascar Oil shares suspended on London’s Aim; development of 1bn-barrel Tsimiroro field under threat

MADAGASCAR Oil’s woes seem no nearer resolution – and its shares remain suspended – despite news that it remains in talks with the Madagascar authorities over the fate of its heavy-oil assets in the country.

In mid-December, having just raised £50.5m from an initial public offering on London’s Alternative Investment Market, the company was forced to suspend its shares after the Madagascar government said it was interested in compulsorily buying all the blocks controlled by Madgascar Oil, with no guarantee that it would pay the market price for the assets.

On 8 February, the company issued a statement revealing that it remains in talks with the ministry of mines and hydrocarbons and that the ministry is conducting an audit to establish whether Madagascar Oil has complied with the terms of the production-sharing contract (PSC) that governs the development of the company’s Tsimiroro heavy oilfield – the asset is vital to the company’s immediate prospects.

Mamy Ratovomalala, the mines and hydrocarbons minister, told Madagascar Oil on 26 January that the audit was “not a cause for concern” and that the company should be able to return to discuss the results around a month later, according to the firm.

While Madagascar Oil says it is confident the audit will show it has complied with the PSC terms, it remains “extremely concerned” by the delays caused by the government’s intervention and that its shares would remain suspended.

“The inevitable consequence of the ministry’s prior actions, and now the added effect of the announced audit, is a further delay in our ability to proceed with the significant work planned for 2011,” Mark Weller, the firm’s chief operating officer, said.

It is unclear whether the ministry is trying to extract improved PSC terms and, if so, what they might be – the government has been starved of cash since donors suspended aid following a peaceful coup last year. A Madagascar Oil spokesman declined to elaborate further on the nature of the talks.

Under the existing PSC, Madagascar Oil would receive an allocation of 75-90% of production for capital reimbursement until capital payout, in return for putting up all the funding for the project, says the firm. The balance is then split on a sliding scale that gradually moves in the state’s favour over time. All oil sales after costs are recouped would be subject to taxes totalling around 30%. A royalty starting at 4% would also payable on all sales.

The company says “best estimate” reserves in its Tsimiroro field amount to 0.965bn barrels of heavy oil in known structures, and that there is over 0.780bn barrels of potential in prospective, adjacent structures on the block.

Ratovomalala has said the government is not interested in playing a hands-on role in the sector. In mid-January he told concerned members of the country’s professional association of upstream oil companies – including representatives of Total and Tullow – that the government did not want to become a player in the oil sector.

“However, the role of the government is to ensure we get concrete results. For this reason, the government is under obligation to work only with serious companies,” he said, according to the Midi Madigasikara newspaper.

So far, it is only the fields controlled by Madagascar Oil that have come under government scrutiny. Bemolanga, another heavy oilfield in which the firm has a 40% stake, but which is controlled by Total, has received the same treatment – reflecting, say regional analysts, the government’s unwillingness to take on a company based in France, the former colonial power and main bilateral donor.

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