Madagascar: Government issues the first oil exploitation licence

  • New decrees taken by the Council of Ministers on 15 April 2015 relating to approval of the Tsimiroro Development Plan and the granting of an exploitation and transport licences for the Tsimiroro Project.
  • The Tsimiroro Project becomes the first oil project to enter into the development phase in Madagascar.
  • The Tsimiroro Project demonstrates collaborative approach of the Government of Madagascar (the “GoM”) for operators in upstream oil sector.
  • In other side, this new status of the country raised new challenges to be faced in the near future.

On 15 April 2015, the GoM decided to approve by decree the Amendment No. 2 of the Production Sharing Contract (the “PSC”) entered into between the Office des Mines Nationales et des Industries Stratégiques (the “OMNIS”) and Madagascar Oil SA (“Madagascar Oil” referred also as the “Company”) in respect of the Tsimiroro Contractual Area of the 3104 Block (the “First Decree”) and the granting of the Hydrocarbons Exploitation Mining Title (the “Exploitation Licence”) and the Hydrocarbons Transport Mining Title (the “Transport Licence” and together with the Exploitation Licence, the “Licences”) of the Tsimiroro Contractual Area of the 3104 Block (the “Second Decree”).

About Tsimiroro and Madagascar Oil

Tsimiroro is situated in the western side of the island of Madagascar longing the Mozambique Channel. The 3104 Block refers to the oil block attributed to Madagascar Oil in the Tsimiroro region under an exploration licence and the PSC entered into with the OMNIS in 2004. The Company estimates the reserves of mainly formed heavy oil covering the Tsimiroro region of around 1.7 billion of barrels.

Madagascar Oil SA, the operator in the 3104 Block is a company registered in Madagascar.Its parent company, Madagascar Oil Limited is incorporated under the laws of Bermuda and listed on the Alternative Investment Market of the London Stock Exchange since 2010.

Madagascar Oil holds also four others exploration licences in the island, one of them in consortium with the French conglomerate, Total.

It should be considered that no more than 225 offshore blocks and 4 onshore remain currently free and the GoM is making frequent promotional marketing to attract new promoters. From 2004 to 2013, oil upstream sector activities’ investment in Madagascar reached around USD 1.5 billion.

What are the effects of these decisions to the Company?

The First Decree authorises Madagascar Oil to concretise the Tsimiroro Development Plan submitted for approval to the public authorities in Madagascar in October 2014. This allows mainly the Company to undertake the construction of installation such as pipelines, equipment and systems necessary for placing required wells for exploitation of oil and for processing and treatment of extracted products. In the short term period, Madagascar Oil under this decision can sell its 100,000 barrels currently in storagemarket held during the previous test phaseson thedomestic.

On another point, the Second Decree allows the exploitation of oil and the transport of extracted products on the area covered by the 3104 Block in which Madagascar Oil is the main operator. This decision in unprecedented in the history of oil exploration in the island Madagascar as it is the first time that an exploitation licence has been issued for an oil block.

The licence is valid for a first period of twenty-five years renewable for a period of 5 years.

Honeymoon following tumultuous relationship?

The relationship between the GoM and Madagascar Oil has not already been cordial as it is the case now. In 2011, the Company has started arbitration proceedings claiming breach of the PSCs by the GoM following a declaration of “force majeure” announced by Madagascar Oil. Alternatively, Madagascar Oil has also submitted a notice of dispute to the government under rules of the International Centre for Settlement of Investment Disputes with regard to its threatened expropriation of the company’s assets. In the interests of the parties, a resolution of the dispute has been announced in June 2011. Three years later, the new-formed government headed by the President Rajaonarimampianina (officially elected in December 2013) approved the declaration of commerciality of Madagascar Oil and a decree approving the test sales of about 55,000 to 73,000 barrels of crude oil has been issued.

And now, as admitted by the current CEO of Madagascar Oil, they “are grateful to the Government of Madagascar for its extensive and constructive contribution to this process and the strong working relationship [the GoM] have built as a result.

What would be the main challenges after these decisions?

The first issue for the Company would be to fund their development project. In October of last year, the Company made an offer to raise fund in which they receive around USD 0.2 million, largely below their expectations. However, since the official announcement of the GoM’s decisions, the share price’s value of the Company increased as much as 147% .

Another important hurdle is the recent fall of global oil prices which would be a difficult struggle for the Company to render commercially profitable the project in the future. But the exploitation licence is a long-term permit and it seems that the Company expects more profitability in the future.

In August 2014, the GoM issued a Framework Document on National Policies for Mining and Petroleum in which the question of updating of the Petroleum Code has been raised. The GoM and the OMNIS is currently dealing with the draft of the new code in which operators in the sector have been involved.Main point that will be probably raised in the new draft would be the establishment of the National Oil Company in charge of management of State’s interests.

Juristconsult Chambers