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Heavy hitter searches for global reach

Al Njoo, chairman of the heavy oil-focused Benchmark Group and its subsidiary Madagascar Oil, is seeking to put the Indian Ocean island on the global hydrocarbons map

Al Njoo has been in the heavy oil business for three decades. His latest venture, Madagascar Oil, is on the verge of ramping up production from a pilot scheme on the world’s fourth largest island. His ambitions are larger still—turning Madagascar into major exporter and regional trading hub venue.

The Indonesian is also principle of Singapore-based Benchmark Group, which owns a controlling stake in Madagascar Oil. Benchmark’s first three stream flood projects were developed by its Calgary-based subsidiaries Nations Energy and Nations Petroleum—of which Njoo was the founder and a director—in Kazakhstan, Azerbaijan and California.

The Kazakh asset was acquired in 1997 via a privatisation. “When we took it over, production was around 5,000bl/d and we built it up to 50,000bl/d,” he says.

“Then Citic Group of China acquired it from us in 2007 for $1.9bn.” The Azerbaijan asset went through a similar development before being sold to Russian oligarch Mikhail Gutseriyev, the founder of Russneft. The California Lost Hills greenfield development was later sold to US independent Occidental.
More compelling

“It is not that we develop to sell,” he says, noting that the group generally holds assets for a decade. “But sometimes, when you develop an asset, people come along that find it even more compelling and offer a price that we have to seriously consider. Occidental, at that time, was very keen on expanding its California heavy oil resources and acquired not only ours but other properties.”


“The production sharing contract (PSC) terms were very attractive—probably the most attractive in the world”


Around seven years ago, bankers called from London to find out whether he was interested in investing in Madagascar Oil. He was keen enough to contribute capital towards pilot production. “I was basically the lead investor in several rounds. Initially, I took up 20pc, then 40pc and eventually I ended up as a 90pc shareholder.”

Two factors had captured his interest. The first was the “huge reserves, enormous reserves”, he says of the 10bn bl oil in place across the 6,670km² block 3104, containing the Tsimiroro structure, that emerged in a geology report commissioned by Shell, the previous owner. “That was the number one attraction.” The initial development is underway in just the northern part of the block, which has oil in place of 1.7bn bl.

To the south of the block, at the deeper-zone level, there is “potentially huge [amounts of] light oil, which we will be exploring” he says. Encouragingly, a Shell well located to the south of its block found light API 41° oil. “That would be highly interesting to us, so we are looking at an exploration programme.”

The second factor was the terms offered. “The production sharing contract (PSC) terms were very attractive—probably the most attractive in the world. The contract effectively gives us about half of the economic interest. We have the commercial license to develop for 25 years but it can be extended another 25 years, so effectively 50 years.”

The pilot stage is complete, producing c.1,000bl/d, so the company is preparing to ramp up production. “We will be expanding this initial development to 10,000bl/d. Subsequent to that, we are probably looking at adding c.20,000bl/d on a modular basis.” He expects peak production to be 180,000bl/d.
As it is a shallow well, Njoo expects progress will be quick. “We will hit 10,000bl/d in 18 to 24 months.” This would require infrastructure construction, but as the site is just 150km from the west coast port of Maintirano, building a pipeline “is highly manageable”, he says.

Sweet taste

The Madagascar Oil block contains sweet crude, with sulphur content at just 0.3pc. This is fortuitous given the global implementation of IMO 2020 that has mandated maximum 0.5pc for shipping since 1 January 2020. “Through blending, we are able to meet the requirements without going through a refinery process. That is a big deal. It is a massive market and there are severe shortages—the market estimates a shortage of 2-3mn bl/d.”

The rough industry consensus is that the sweet-sour crude premium will last for five years. “My sense is that it going to be longer, I think it will be seven years,” says Njoo, noting the time needed to approve capital budgets and other processes to retrofit refineries.


“China is a game changer because it is interested in developing a deepwater port in northwest Madagascar”


That Madagascar Oil’s heavy crude is suitable for maritime fuel oil is its most obvious attraction. “I meet with the president of Chimbusco [the monopoly provider of bonded bunker oil in China],” he says, noting that its co-owners—state-controlled oil firm PetroChina and the world’s biggest shipper China Cosco Shipping—are among the most affected. “China is very concerned.”

Chinese influence

The China Development Fund and the Silk Road Fund “have been talking to us too”, says Njoo. They are particularly interested because it is low sulphur, he continues. “The key is that they see this as a long-term supply source.”

China has already become heavily involved in Madagascar, which forms part of its Belt and Road Initiative. “China is a game changer because it is interested in developing a deepwater port in northwest Madagascar, at Narinda Bay. And they are interested in investing in infrastructure development—roads, ports and energy.”

While access to electricity is among the lowest globally, at 13pc of the population and ranking 174 of 180 in the world, according to the World Bank, there is potentially demand for fuel oil for power generation. The country’s generation mix has historically been split 60pc thermal and 40pc hydro and—while the government’s focus is undoubtedly on capturing its annual 2000kWh/m² solar potential with various projects—fuel oil can play a role on the thermal side.

Njoo says that the government is also banning the domestic use of fuel oil with sulphur above 0.5pc. “That is going to be very positive for us in terms of marketing to domestic buyers.” Indeed, the timing is fortuitous and the opportunity will not be lost. “We have a framework contract with the government, we are at the stage of finalising a contract to sell to the national power company [Jirama]” says Njoo. “It is a substitute to high-cost imports.”

The economics are very attractive. The internal rate of return (IRR) is 30pc unleveraged, according to Njoo, “partly because of the attractive production sharing contract (PSC) terms”. The IRR is based on a $60/bl assumption, which may prove conservative if there is a lasting premium on low sulphur liquids.

The project is Benchmark’s sole focus. It has already invested $0.5bn and will put in another $300mn for the production expansion. “We are, of course, looking for outside investors, for project finance,” says Njoo. While that process is ongoing, he assures Petroleum Economist that there is “a lot of interest” because of the benefits from IMO. “We are looking for alignment of interest and a partner that can contribute to a strategy, especially in terms of markets. We are talking to everybody with the aim of [securing investment by] summer 2020.”

An investment from a global shipping company would be a prime candidate, as it certainly ticks the strategic box. Danish conglomerate Maersk has stated its fuel bill will increase by billions. “Just imagine, if they had taken an equity stake in a development such as this—it would be a very effective hedge. I am sure you can appreciate that.”

Madagascar has benefited from increasingly stable politics in recent years. This follows a period of turbulence in the wake of a military coup almost exactly a decade ago, when the then president Marc Ravalomanana was ousted by protesters led by Andry Rajoelina. In 2019, sitting president Hery Rajaonarimampianina lost in the first round, leaving the two former adversaries to contest the run-off. Andry Rajoelina retook the presidency in an election the United Nations secretary general Antonio Guterres described as “peaceful and orderly”.

While the new president was elected last January and the country soon afterwards suspended its 44-block offshore licensing round, these events were apparently not linked. Rather, the delay was widely put down to the delays to the introduction of a new petroleum code. In any case, Madagascar Oil was not affected and, Njoo says, given the material scale of the project for the economy, all parties’ interests are aligned it is progressing smoothly.

Madagascar is among the less socio-political difficult of its east African peers, without the ethnic or religious strife that has held back developments in places such as Mozambique and Somalia. “There is nothing like that,” says Njoo. “They see that our company could transform the country into an oil exporter, so they are fully supportive. And, of course, there is the income. They get 4pc royalty.”

The country is open to international investment and is seemingly back in favour after the hiatus following the 2009 military coup. The biggest commitment, maintained from the pre-coup period, is a combined $7bn by the Sumitomo-Sherritt International-Korea Resources joint venture in the Ambatovy nickel project. There are also notable investments by mining heavyweight Rio Tinto in an ilmenite mine and a Chinese joint venture between Handan and Wisco in an iron ore development in the north of the country. “Ours is number three and soon will be number two,” adds Njoo.

Environmental credentials

Environmental campaigners are seemingly opposed to all new upstream projects and one may expect in Madagascar, famous for its biodiversity and unique native species, to raise more heckles than most. “No, not really,” he says. “We operate in an arid desert area in the western half of Madagascar. The Eastern side is populated and tropical, but western is desert. We have got all the environmental licenses. You have got to do the right thing, really do environmental impact assessment.”

180,000bl/d Block 3104 peak production forecast

He says Madagascar Oil is talking to solar energy companies, including California’s GlassPoint and Norwegian Scatec Solar, about producing zero-carbon energy for steam flooding. “For our production we need steam to reduce the viscosity before we pump the oil. We are looking at a solar solution to lower our costs at the same time,” he says. “It hits the ESG [criteria].”

Even the harshest critic would appreciate the social and economic benefits that industry on this scale can bring, assuming a country’s governance regime is robust. Njoo insists his firm is “very conscious of contributing” to the local economy. “We have set up clinics and schools and have brought in a dozen professors to update the petroleum engineering curriculum. It is now more practical, so we can start employing the graduates.”

Setting an example

It has also sought to build “technical capacity”—for example by taking a 60-person delegation from the country’s Ministry of Petroleum to Indonesia to see the fruits of its 50-year energy development. “Indonesia invented the PSC,” he says. “So we were sharing with them what their new petroleum code should be to attract investment.”

The world’s biggest bunkering centre is another model from which Madagascar might learn. “I hosted the visit of the former president [of Madagascar] to Singapore. We felt that Madagascar could potentially be the ‘Singapore of East Africa’ in terms of becoming an energy production and trading hub.”

While Singapore has no oil and gas, its huge refinery and petrochemical complex exports material quantities of refined products back to resource-rich neighbours Malaysia and Indonesia, due to its first president Lee Kuan Yew fully integrating the city-state into the wider Asean region, today a $3tn economy with 650mn people. “Madagascar could be like Singapore, a potential refinery and trading hub and, therefore, integrating Madagascar to a much bigger commercial economy, a 350-400mn person economy,” says Njoo. “The opportunity is huge.”

Perhaps, but in a country where 75pc of the population live on less than $1.90/day, in PPP terms, according to the World Bank, there is clearly a long way to go. Njoo does not let this temper his ambitions. “Part of the issue, in a way, is that the government needs to start thinking about privatising some parts of the economy such as, for example, the port development. For a major investor to come in and invest $1bn or so, they would want to manage the port.” 

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