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Madagascar Oil getting back on track

London-listed Madagascar Oil’s Tsimiroro heavy oil project in Madagascar looks to be getting back on track after a reserves upgrade and successful fundraising on the London markets boosted the company’s cash pile by $26.5 million

Madagascar Oil said in a statement following the share issue that the funds will allow it to continue the Tsimiroro steam-flood pilot testing through August 2014, carry out additional drilling at the project this year, as well as conduct further airborne and seismic surveying through 2013.

The fundraising will also be seen as an encouraging sign of confidence in the troubled project. The company listed on London’s Alternative Investment Market in November 2010 and raised £50 million ($79 million) to put towards developing the project. Things, however, soon took a turn for the worse for the company.

Just weeks after the listing, the government of President Andry Rajoelina said that he was considering nationalising Madagascar Oil’s assets. Many analysts claimed that the government could then sell those assets to one of China’s state-run companies as part of a more general effort to build ties with China. The dispute forced the company to suspend trading in December 2010 and subsequently declare force majeure on its contracts in April.

By June 2011, however, the company appeared to have weathered the worst of its crisis. Madagascar Oil secured public assurances from the Rajoelina government that it would honour the company’s production sharing contracts. Madagascar then lifted its force majeure and resumed trading, though the company’s share price immediately dropped by more than half from £0.74 per share to £0.33 per share as investors remained wary.

Regaining momentum

The company and its flagship Tsimiroro project have regained some momentum since then. In September, the company announced a significant reserves upgrade at Tsimiroro. A Netherland, Sewell & Associates report raised the best estimate of contingent oil in place from 965 million barrels to 1.688 billion barrels and lifted the best estimate for prospective oil-in-place resources from 786 million barrels to 2.189 billion barrels. Total best estimate contingent and prospective resources at Tsimiroro are now 3.9 billion barrels, while the high estimate is 9.3 billion barrels, nearly three times the early estimate.

Madagascar Oil has also improved its economic case for the project. Because of the reserves increase, the company now says that the break-even Brent price for the project is less than $40 per barrel, compared to the earlier break-even estimate of $47/b. The company is assuming a 70% recovery rate from steam-flooding operations at the field, though it says with Brent prices at $80/b, it could break-even with a recovery rate of just 22%.

Assuming an $80/b Brent price, the company has estimated the mean value of the field at $15.2 billion, including contingent and prospective resources. It expects 52% of profits over the course of the Tsimiroro project to go to the government and 48% to the company. With Brent trading at over $120/b, the economic case for the project looks strong, although the development’s achievable recovery rate remains a source of uncertainty.

The company hopes to address that uncertainty with a steam-flood pilot programme to be launched later this year. Madagascar Oil hopes to be producing 1,000 barrels of oil a day (b/d) by late 2013. If that pilot programme is successful, the company hopes to start commercial production by 2017 with a target peak production of 150,000 b/d.

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