Madagascar Oil Declares Block 3104 Tsimiroro commercially viable

Madagascar Oil has announced it has determined that the Block 3104 Tsimiroro discovery is a ‘Commercial Discovery’, under the terms of the Production Sharing Contract between OMNIS and Madagascar Oil S.A. (‘PSC’).

Declaration of Commerciality and Field Development Planning

The Tsimiroro Oil Field, the Group’s flagship asset, is a giant heavy oil field in western Madagascar with independently audited contingent oil in place of 1.7 billion barrels (P50) Stock Tank Oil Originally In Place (‘STOOIP’). Madagascar Oil S.A. has been operating the SFP since April 2013 and the data from the SFP, together with field development, technical and marketing studies have been used to support today’s declaration of a Commercial Discovery under the terms of the PSC.

The Group plans to continue to operate the SFP throughout 2014 and into 2015 to provide additional data on how the Tsimiroro Amboloando reservoir responds to both Cyclic Steam Stimulation (‘CSS’) and steam-flood thermal recovery methods to inform the future development plans for the Licence. The Group proposes to commence development of the well-defined high quality reservoir areas close to the existing SFP area, while also addressing the geological uncertainties in other areas of the Tsimiroro Main Field. Appraisal programmes including drilling, seismic acquisition and the newly tested land magnetometer techniques are being prepared for implementation in 2014 and 2015.

In accordance with the Licence terms, following the submission of the declaration of a Commercial Discovery, OMNIS will apply for a Titre Minier d’Exploitation (‘Mining Title’), which would be effected by a decree (the “Decree”). The Group will work with OMNIS and other Madagascar Government bodies over the coming months on the structure and content of the FFDP, the approval of which would lead to the Decree converting the PSC from the current exploration phase to an initial 25 year exploitation period.

The Appraisal Report submitted with the Declaration of Commerciality is written in compliance with the PSC terms and is primarily a geological description of the Tsimiroro Main Field Amboloando reservoir and other discovered resources and structures such as the Tsimiroro South Accumulation in the Licence. The geological description includes the incorporation of the 2012 acquired Airborne Gravity Gradiometry survey which has allowed a new compartment model of the Tsimiroro Main Field to be developed. Field compartments have been evaluated according to existing well information and graded according to their suitability for thermal recovery applications. An initial risked probabilistic assessment of oil in place is being applied on a compartmental basis to allow identification of resources that thermal recovery techniques can be applied to. This will help to highlight the priority reservoir compartments for appraisal drilling in 2015 to confirm their potential for development. It is envisaged that a new Competent Person’s Report will be commissioned when the results of this appraisal work have been evaluated.

The Tsimiroro full field development concept involves a phased areal development of the Amboloando reservoir with the initial phase targeting the fault compartment containing the existing SFP area. This initial phase anticipates trucking the Tsimiroro oil into the current local Madagascar Heavy Fuel Oil market of around 2,000 barrels per day. Thereafter, higher production volumes would become available for sales by marine exports to international destinations in the region. The development of the field will be characterised by an incremental approach to existing facilities with upgrades of the SFP Plant being implemented to accommodate increased volumes. New wells will be drilled to a similar pattern to the existing SFP where the terrain allows.

Initial development activity will be on a step-by-step basis and will involve infrastructure improvements, including road upgrades. Civil engineers, retained by Madagascar Oil S.A., have prepared a detailed work plan for upgrading sections of the RN1Bis (Route Nationale) road that will be used to transport 2014 crude oil test volumes by truck between Tsimiroro and potential end-users in the capital city Antananarivo. Work has already commenced on upgrading the Madagascar Oil S.A. maintained road section linking the Tsimiroro SFP to the RN1Bis.

Field geological and reservoir appraisal will be conducted in parallel with the initial development phase to identify and confirm the incremental areas for development, leading to a decision in due course over the installation of a new export pipeline and tanker offloading facility. The Board believes that further areal development will allow the full field potential to be reached as well as incorporating appraisal and development of other discovered and potential resources on the Licence.

The FFDP will be discussed with OMNIS, the Ministry of Strategic Resources and other national and local stakeholders to incorporate all relevant issues. The development plan will also require various environmental approvals before work can commence and the Group is in active discussions with Office National pour L’Environnement (“ONE”) to ensure that all environmental issues are addressed to their satisfaction. This will include the completion of various Environmental Impact Assessments throughout the various stages of the development.

The Group will continue, and increase over time, its current commitment to local and regional healthcare, sanitation and education infrastructure development, as well as focussed income generation, local skills development and capacity building as part of its future plans.

Appraisal drilling is also being planned in the compartments where existing well information indicates reservoir quality exists to allow thermal recovery techniques to be attempted. The field structural description will also benefit from increased seismic coverage to better define the oil bearing Amboloando reservoir. Testing of seismic acquisition techniques specifically designed to image the shallow depths is being planned for possible implementation in 2014. Test results will allow the planning of a 2015 seismic acquisition programme across the initial development area. Mapping of the igneous dyke network and fault pattern is required to understand the efficiency and applicability of steam flooding as a thermal recovery technique. A test of a ground magnetometer survey was completed in April 2014, yielding high quality definition of the igneous dyke network and plans are underway to extend this survey over the intended initial development area.

Operations Update

Oil Production and Steam Injection

Cumulative oil production from the SFP, which commenced on 28 April 2013, was 83,635 barrels of oil, as at 1 May 2014, and 45,932 barrels of oil are stored in the Tsimiroro SFP Storage Tanks. The remainder of the oil has been used for fuel for steam generation since the start-up of SFP operations. The three operational steam generators continue to run effectively on 100% Tsimiroro crude. The low asphaltene content of the crude is contributing to a very low cumulative ash build up from the combustion process and the steam generators have required little planned clean-out maintenance.

Oil production rates averaged 468 BOPD in April 2014 and 361 BOPD in March 2014, as compared to 425 BOPD in February 2014 and 330 BOPD in January 2014. In 2014, oil production from the SFP has averaged 395 BOPD to the end of April. Monthly variations are related partly to the CSS thermal method which results in peaks and troughs of oil rate depending upon where individual wells are in the cycle. As is normal for a project of this nature, peak rates are not indicative of the long term average production performance on a well by well basis. Thermal responses indicative of the steam-flood potential of the reservoir are being observed in wells PSF-15 and PSF-1 as a result of steam injection at offset wells.

The three commissioned steam generators have been operational during February through April. These three steam generators are expected to enable the continuous steam injection and cyclic requirements of the SFP wells to be met during 2014.

The shallow casing leaks experienced in wells ISF-4, ISF-6 and PSF-9 have resulted in these wells remaining shut-in pending remedial action. The remedial rig operation to re-instate these wells is planned to commence this quarter.

Other Operational Developments

Madagascar Oil S.A. is in the process of obtaining approval for the commencement of local test sales of between 55,000 and 73,000 barrels of Tsimiroro crude oil in the second half of 2014 and lasting for up to six months under the terms of the current exploration licence. This approval is being sought from the recently-elected President of the Republic, the newly-created Ministry at the Presidency in charge of Strategic Resources and OMNIS.

This would be the first market test of crude oil produced within Madagascar and, subject to approval, sales are due to commence after the conclusion of a tender process involving downstream companies currently operating in Madagascar. This test is designed to establish Tsimiroro crude as a blended heavy fuel oil substitute in the local market, mainly for power generation purposes, and currently stored oil volumes will initially be made available for blending. The test will also provide valuable input to the Group’s development planning activities which include sales to the local Madagascar market. A new purpose built facility for custody transfer, blending and truck loading has been built at the SFP by Madagascar Oil S.A. for this test period.

The RN1Bis Route Nationale road will require upgrading after the 2013/14 rainy season to allow truck transportation of the blended product from the Tsimiroro SFP to markets in Antananarivo. Upgrade work has already commenced on the branch connecting the Tsimiroro SFP to RN1Bis, with agreements pending with the Roads Authority over work on the Route Nationale. Madagascar Oil S.A has agreed to finance the essential road upgrade to allow early sales to commence.

Finance

The Company is working on a financial strategy to secure the funds to support the next phase of the Group’s planned activities which will include the commencement of the Tsimiroro Development, further appraisal drilling and seismic activity on the Tsimiroro field, ongoing exploration licence activities and for corporate working capital requirements. The scale of funds will be determined by the pace of the Tsimiroro Development, number of wells required and forecast revenues from production. The Company is actively looking at a number of fund-raising options and further information will be provided to shareholders in due course on how the Company will finance the Group’s ongoing and planned business plans.

Exploration Licences

The 3105/3106/3107 License farm-out campaign continues with additional entrants active in the data-room in April. The outstanding mining titles for each licence have been presented to the Cabinet for confirmation, allowing greater certainty over the remaining term.

Gordon Stein, Executive Director and Chief Financial Officer, commented:

‘We are very pleased to have entered the next phase of Madagascar Oil’s development by declaring to our partner, OMNIS, that the Company has determined that the Tsimiroro field is a Commercial Discovery under the terms of the Production Sharing Contract. We will continue to seek production and thermal recovery information through operation of the Steam Flood Pilot, whilst working with the relevant stakeholders in Madagascar on agreeing a development plan for the full field. We are already in active conversations with OMNIS, the environmental authorities (ONE) and the new Government and believe that we have established very good working relationships.
‘It is clear to the Board that the new Government is actively encouraging the development of projects such as Tsimiroro, which should have very positive economic benefits for the country. We would hope to obtain Development Plan approval for the full field before the end of 2014 and to commence new drilling and facility upgrades in 2015. The planned early test sales of Tsimiroro crude in the near future would also add Madagascar to the list of oil producing nations, as well as generating cashflow for the Group. This will also be a major milestone for Madagascar and the Company is delighted to be a part of this new phase in the country’s economic development.’

Author: Samuel Kamau Mbote

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