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Madagascar Oil and Total drop Africa’s biggest oil sands project

Madagascar Oil’s annual report released on Thursday shows the company is scuttling its project with French giant Total to develop a 1.2bn barrel oil sand deposit on the island after three years of extensive work. The Bemolanga bitumen deposit adjacent the Tsingy de Bemaraha nature reserve (pictured) was first drilled in the late 1800s and would have cost upwards of $8bn to bring into operation.

Madagascar Oil has been through a torrid six months – after raising $80m in its debut on the London AIM market in December the stock was suspended in March after the company declared a force majeure over threats of expropriation by the Malagasy governments of its other oil field Tsimororo. When it resumed trading this week the stock promptly lost 50% and has not recovered since.

Madagascar Oil was trading at GBP 33.25 pounds on the AIM market in afternoon trade on Friday. It is down from a high of GBP 98 on debut.

Madagascar Oil details the decision in its 2010 Annual Report:

The Bemolanga block is a 5,463 square kilometre area and contains the oldest know hydrocarbon deposit in Madagascar. The first wells were drilled in the late 1800’s and work has been conducted over the area of what has been determined to be a potential bitumen mining project. The block is operated by Total (60% working interest) and Madagascar Oil (40% working interest) and following the farm-in by Total in 2008, 72 core wells were drilled in 2009 and an additional 86 wells were drilled and cored in 2010.

There was considerable work done to define the mineable area and bitumen content based on the two drilling programmes. The most significant finding is that the bitumen content ranges from about 3.5 weight percent to approximately 11.0 weight percent, with the effective mineable area at the level of an average of 5.5 weight
percent bitumen in the ore. For reference, this bitumen content is approximately half of that found on the Canadian tar sands.

In addition, extraction testing and detailed cost estimates for mine and extraction plant design were conducted by both Total and Madagascar Oil. Removal of the
bitumen from the ore was tested extensively with hot water extraction and subsequent froth treatment and the resulting production and sales streams were estimated.
The sales stream is an approximate 10° API product that will require diluent blending or upgrading for subsequent pipelining to the west coast of Madagascar and delivery
via offshore terminal to crude tankers. The shipping and handling were also estimated, along with the projected market value of the blended. A key factor in the
evaluation is that, with no current native oil or gas supply, the required diluent must be imported and the project power requirements will need to be fueled by either the
bitumen production or the diluent import.

There is an estimated median volume of approximately 1.2 billion barrels of mineable bitumen present (Madagascar Oil share: 472 mmbbls). However, at an evaluation price range per barrel of $60-$100 Brent, the cost of handling the ore, the bitumen extraction, and the upgrading and shipping, does not presently support proceeding with the mine project. In June 2011 Total and Madagascar Oil received approval from OMNIS for a modification of the Bemolanga work plans to focus on deeper conventional plays on the block. An extension of one year was granted in June 2011 with the commitment to run airborne gravity surveys later this year over the entire block area to identify possible conventional hydrocarbon plays, with an option for a further two-year extension to drill a well. The mine will continue to be evaluated for potential improvements in extraction and upgrading technology.

The Bemolanga project spent approximately $28 million in 2010 and Madagascar Oil’s 40% share of the costs was carried by Total as part of the farm-in transaction.
Under the terms of the revised Joint Operating Agreement with Total, the Company is carried on the next $10 million of gross expenditures for the revised work programme. reported early in June about troubles at Madagascar Oil and the other big oil sands project on the continent, Italy’s $3bn Eni project with Congo-Brazzaville government which runs out this year:

One of Eni’s 100 square km sample areas in the Congo basin suggest 500m – to 2.5bn barrels of recoverable oil. Eni’s $3bn deal with Congo-Brazzaville for the 1790 square km area also includes investment in the country’s food, health and power generation sectors. Details about the progress of the agreement which was initially signed in May 2008 are scant but the project was supposed to produce some 150m barrels.

Eni’s exploration area extends to within about 20km of the Conkouati-Douli National Park and 50-70% of it is covered by primary forests and regions of high biodiversity in the Congo Basin. Surveys have shown that local communities are largely uninformed about the oil sand developments and the destructive impacts they are likely to have.

The images shows the Tsingy de Bemaraha Strict Nature Reserve located near the western coast of Madagascar in Melaky Region. The area was listed as a UNESCO World Heritage Site in 1990 due to the unique geography, preserved mangrove forests, and wild bird and lemur populations.