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The Return of Madagascar's Oil

The return of Madagascar’s oil

Posted on November 30, 2010
by Jeremy
Make Wealth History

This week Madagascar Oil was floated on London’s Alernative Investment Market (AIM), raising £50 million.

It had to happen eventually. When my family first moved to Madagascar in 1987, American oil company AMOCO was active in the country. They were exploring, and their staff drove distinctive brown Mercedes 4x4s around the capital city. A small primary school had been built to serve the children of AMOCO staff. They were not around for very long. Madagascar’s oil is locked up in bitumen and oil sands, and just wasn’t economic to extract at the time. Leave it 20 years however, and the rising price of oil has brought marginal producers and unconventional oil sources back into the game. I’ve been expecting, with some dread, the day when someone would remember Madagacar’s modest reserves.

I say with dread because the chances of this working out in Madagascar’s interests are minuscule. It is one of the world’s poorest countries, but when it comes to oil that just makes it all the more likely that they will get a bad deal. Looking at the details of this round of investment certainly seems to confirm my suspicions.

For a start, the company that floated on AIM yesterday may be called Madagascar Oil, but is in no way Malagasy. It was founded by an Australian and a South African, and French oil giant Total are the on-the-ground partner. It is registered in Bermuda, naturally, and has its administrative headquarters in Houston, Texas. Profits, it seems, will be going to everyone except the people who own the oil.

Still, at least the Malagasy government will be collecting a share, right? Barely. The tax deal struck with Madagascar’s government is unprecedented, according to the Guardian. Because the country is unstable and a difficult place to do business, investors needed a pretty sweet deal to persuade them to take the risk. Somehow, the offer on the table is for the company to keep 99% of profits for the first ten years, split 80-20 with the government for the next ten, and 70-30 for the decade after that.

Bear in mind that Britain has split North Sea oil 50-50 over the last decade. Chad charges 60% corporation tax on some of its oil fields, Saudi Arabia has a sliding scale of tax rates and can demand as much as 85% of revenues. Norway, widely considered to have exercised the most progressive stewardship of its oil reserves, charges a 78% tax on its oil. You naturally offer a lower tax rate to get things started, but 1%? That leaves nothing for the government, let alone the local people who live in the areas that will be affected. To keep just 1% of your oil revenues is so hugely generous to investors that I cannot believe for one second that it was negotiated honestly.

To make matters worse, we’re talking about tar sands here. In the Bemolanga field, just 5.5% of the sand is bitumen, compared to 11% in Canada. It won’t hit the scale of Canada’s tar sands works, but the processing that does take place will be dirtier. The sands will be excavated in open-cast mines, and processed with steam to extract the oil. It consumes and pollutes vast amounts of fresh water, which then sits in tailing ponds. If there’s a crumb of comfort here, it’s that Madagascar’s biodiversity is concentrated in the remaining forests on the East side of the island, and the oil is to the West, but it’s still going to make a mess.

In the World Bank’s list of countries by income, Madagascar is 151st out of 162. Bringing oil reserves online should be a once in a lifetime opportunity to change that for the better, but if this is the final deal, that fossil fuel wealth will be squandered.

http://makewealthhistory.org/2010/11/30/the-return-of-madagascars-oil/

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