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Madagascar Oil’s patience snaps

UK firm declares force majeure; Chinese investors may step in

THE declaration of force majeure on Madagascar Oil’s main oil assets in Madagascar is an effort to dissuade the government from expropriating the blocks. But the move may not work out in the company’s favour. And Chinese investors are waiting in the wings.

Madagascar Oil listed its shares on London’s Alternative Investment Market last November, raising around £50m ($80m) to put towards the cost of developing its Tsimiroro heavy oilfield on the island. But it had to suspend trading in its shares the following month, after the Malagasy government said it might compulsorily repurchase the assets and that it was instigating an audit to assess whether Madagascar Oil had breached the terms of its production-sharing contract (PSC).

According to the firm, it is unable to carry out work under the PSC following weeks of fruitless efforts to meet officials from the ministry of mines and hydrocarbons, while no findings from the audit have been presented.

With the company keen to proceed with the delayed approvals process for work on the project, the force majeure declaration is aimed at breaking the stalemate. “The company hopes the declaration will encourage negotiation with the government,” Madagascar Oil said in a statement, adding that the move was not intended to be a hostile act and that it would rescind it if the government agreed to the necessary steps to allow a return to work.

Under dispute are reserves for which the firm’s “best estimate” is 0.965bn barrels of heavy oil in known structures, with over 0.780bn barrels of potential in prospective, adjacent structures on the Tsimiroro block.

Madagascar Oil is adamant it has complied fully with all PSC obligations and has provided adequate documentation to the ministry regarding its activity on all of the blocks. Meanwhile, the government has given little away on its strategy regarding Tsimiroro.

One clue to that may lie in the involvement of the Hong Kong-based China Investment Fund (CIF), which recently formed a joint venture with the state – Madagascar Development Corporation (MDC). CIF is reportedly involved in the government’s audit of Madagascar Oil’s operations, while MDC is thought to be a possible candidate to snap them up, if the audit finds fault.

The government of President Andry Rajoelina has been reassessing the country’s oil policy, and has placed increasing emphasis on its relationship with Chinese firms. Eager to sate Chinese thirst for oil – and mining products – they may be offering the prospect of larger cash injections for near-empty government coffers, analysts say. Madagascar Oil has been operating in the country since 2004 and drew up its PSC with a previous government.

A realignment of government priorities may also be behind its decision, in early March, to suspended tenders for 225 offshore oil blocks until further notice.

The situation is further complicated by a highly uncertain political situation. A prime reason for the country’s poor finances is the imposition of sanctions on it by some countries and the suspension of donor aid because of concerns over the way Rajoelina assumed power in a peaceful coup in 2009, ousting his predecessor Marc Ravalomanana.

Under the terms of a roadmap brokered by international mediators, which is aimed at defusing the political impasse, Rajoelina’s government should not make new long-term commitments until an election is held. But it remains unclear when that election will be held, or whether the government plans on being even-handed in its treatment of foreign partners in the meantime.

For example, the Bemolanga heavy-oil field, which is adjacent to Tsimiroro and where France’s Total has a 60% stake, with Madagascar Oil owning the rest, has not been subject to the same scrutiny. That project is less well advanced than Tsimiroro, however, and may still need to surmount similar hurdles should Total decide to press ahead with it.

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