untitled2700, 411 – 1st Street S.E. • Calgary, Alberta CANADA T2G 4Y5 • Telephone (403) 237-7763 • Fax (403) 263-4086 • www.norwestcorp.com
CALGARY / VANCOUVER / SALT LAKE CITY / DENVER / GRAND JUNCTION / CHARLESTON / NEWCASTLE NSW
November 18, 2010
The Directors Madagascar Oil Limited 2180 North Loop West Suite 500 Houston, TX 77018 USA
The Directors Strand Hanson Limited 26 Mount Row London W1K 3SQ
Dear Sirs:
BACKGROUND
Madagascar Oil Ltd (“Madagascar Oil” or “the Company”) commissioned Norwest Corporation
(“Norwest”), with assistance from WorleyParsons Canada Services Ltd. (“WorleyParsons”) and
Granherne, Inc.(“Granherne”), to prepare a Competent Person’s Report (“CPR”) on the
Company’s petroleum exploration property, as identified below, to comply with the AIM
Guidance Note for Mining Oil and Gas Companies – June 2009 (“AIM Guidance Note”), issued
by the London Stock Exchange plc for inclusion in Madagascar Oil’s AIM admission document
(“Admission Document”), to be published in connection with the proposed placing and
admission of the ordinary shares of Madagascar Oil to trading on the AIM market of the London
Stock Exchange plc (“AIM Transaction”).
The principal current assets in which Madagascar Oil is interested and which this report
addresses are those of the Bemolanga Oil Sand deposit located in Madagascar. Madagascar Oil
holds current rights for the exploration and development of this deposit under the terms of a
Production Sharing Agreement concluded with the Republic of Madagascar. This deposit is
discussed in detail in the report with the geology, mining and economics sections being prepared
by Norwest. An expert’s report addressing bitumen processing and extraction, extraction
recovery rates and associated cost estimation will be produced by WorleyParsons and an expert’s
PART 5
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report addressing the port facilities and related costs will be produced by Granherne. We
understand that another consulting firm will be responsible for preparation of a separate CPR
which includes an assessment of the Company’s interest in the Tsimiroro Field area heavy oil
project (Block 3104) as well as exploration licenses for three oil and gas prospects (Blocks 3105,
3106 and 3107).
Norwest has not been requested to provide an Independent Valuation nor has it been asked to
comment on the Fairness and Reasonableness of any vendor or promoter considerations.
REQUIREMENT AND STRUCTURE OF THE CPR
Norwest Reviewed geological data provided by Madagascar Oil and has used this information to
prepare a geological computer model for the deposit. This model was used as the basis for the
preparation of a resource estimate. That resource estimate was made in compliance with the
requirements of the Canadian National Instrument 51-101 and the procedures and criteria of the
Canadian Oil and Gas Evaluation (COGE) Handbook, as specified by NI 51-101.
This CPR has been structured to conform, in all material respects, to the structure described in the
AIM Guidance Note but with additional material supplied. In addition to an Executive Summary
there are sections of the report that address the following:
The first section, titled Introduction, includes a discussion of the report scope and terms of
reference, a description of the data sources used, a discussion of Reserves and Resources
and a Risk Warning;
The second section, titled Overview of the Region, Location and Assets, includes
subsections that describe the assets, production rights, reclamation and environmental
liabilities and CP interests;
The third section, titled Property Attributes, that is a detailed description of the property,
its geology and the exploration that has been conducted on it;
A fourth section that is a stand alone detailed statement of reserves and resources;
The fifth section includes a discussion of the development concept and costs projected for
mining;
The sixth section is a discussion of the development concept for bitumen extraction and
processing. This section, including the estimates of costs that accompany it, were
provided by WorleyParsons; and
The seventh section is an economic and sensitivity analysis associated with the
development concept.
PAGE 3 OF 6
The final section of the report is a statement of conclusions.
Prior to Norwest’s, WorleyParsons’ and Granherne’s preparation of technical materials for this
project, a site visit was made by a Norwest senior mining engineer.
At the request of Madagascar Oil, Norwest is available to participate in, and contribute where
appropriate, to the preparation of the Admission Document and other associated documentation
as required. Norwest is also available to review any information or documentation related to the
CPR or the Bemolanga bitumen deposit and provide consent to the use of that information or
documentation provided that the information is accurate, balanced and complete, and consistent
with information already available in the CPR.
LIMITATIONS, DECLARATIONS, CONSENT AND COPYRIGHT
Limitations
Madagascar Oil has confirmed to Norwest and WorleyParsons and Granherne that to its
knowledge the information provided by Madagascar Oil was true, accurate and complete and not
incorrect, misleading or irrelevant in any respect. Norwest and WorleyParsons and Granherne
have no reason to believe that any facts have been withheld.
The achievability of production forecasts and costs are neither warranted nor guaranteed by
Norwest and/or WorleyParsons and/or Granherne. The forecasts as presented and discussed
herein have been proposed by Madagascar Oil in discussions with Norwest and WorleyParsons
and Granherne. They have been adjusted where appropriate by Norwest and/or WorleyParsons
and cannot be assured. They are necessarily based on economic assumptions, many of which are
beyond control of Norwest and WorleyParsons and Granherne.
Resource Estimates
The resource estimates were prepared in compliance with the requirements of the
Canadian National Instrument 51-101 which is an internationally recognized system for the
reporting of resources and reserves of hydrocarbon deposits, including bitumen. As
specified in NI 51-101, the criteria and procedures of the COGE handbook have been used.
However it should be noted that the accuracy of resource estimates is, in part, a function of
the quality and quantity of available data and of engineering and geological interpretation
and judgment. Given the data available at the time this report was prepared, the estimates
presented herein are considered reasonable. However, they should be accepted with the
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understanding that additional data and analysis available subsequent to the date of the
estimates may necessitate revision. These revisions may be material. There is no guarantee
that all or any part of the estimated resources of bitumen will be recovered.
Declarations
Norwest and WorleyParsons and Granherne will receive a fee for the preparation of this CPR in
accordance with normal professional consulting practice. This fee is not contingent on the
outcome of the listing or value of Madagascar Oil and Norwest and WorleyParsons and
Granherne will receive no other benefit.
Norwest does not have, at the date of this report, and has not had in the past any shareholding in
or other relationship with Madagascar Oil or the Bemolanga Oil Sand assets in which
Madagascar Oil is interested. Consequently Norwest considers itself to be independent of
Madagascar Oil.
WorleyParsons does not have, at the date of this report, and has not had in the past any
shareholding in or other relationship with Madagascar Oil or the Bemolanga Oil Sand assets in
which Madagascar Oil is interested. Consequently WorleyParsons considers itself to be
independent of Madagascar Oil.
Granherne does not have, at the date of this report, and has not had in the past any shareholding
in or other relationship with Madagascar Oil or the Bemolanga Oil Sand assets in which
Madagascar Oil is interested. Consequently WorleyParsons considers itself to be independent of
Madagascar Oil.
This report includes technical information, which requires subsequent calculations to derive
subtotals, totals and weighted averages. Such calculations may involve a degree of rounding and
consequently introduce and error. Where such errors occur, neither Norwest nor WorleyParsons
nor Granherne consider these to be material.
Consent and Copyright
Neither the whole nor any part of this report nor any reference thereto may be included in any
other document without the prior written consent of Norwest regarding the form and context in
which it appears.
Copyright of all text and other matter in this document, including manner of presentation, is the
exclusive property of Norwest. It is an offence to publish this document or any part of the
document under a different cover, or to reproduce and/or use, without written consent, any
technical procedure and/or technique contained in this document. The intellectual property
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reflected in the contents resides with Norwest and shall not be used for any activity that does not
involve Norwest, without the written consent of Norwest.
QUALIFICATIONS OF CONSULTANTS
Norwest comprises over 200 staff and provides a specialist consultant and engineering service to
the energy and mineral resource industry. The company has head offices in Calgary, Alberta;
Salt Lake City, Utah; and Denver, Colorado with subsidiary offices in Vancouver, British
Columbia; Charleston, West Virginia and Grand Junction, Colorado.
The company offers expertise in every aspect of resource development, including exploration,
geological interpretation, resource and reserve evaluation, basin analysis and play generation,
field testing and support, surface and underground mine planning and engineering, mine
reclamation, mine permitting, coal preparation, coal utilization, petroleum engineering,
hydrogeology, hydrology, marketing support and economic evaluations. In addition, Norwest
integrates all of their skills and expertise to perform due diligence assignments related to mergers,
acquisitions, divestments and financing. All major activities, from the first exploration hole to
consumption of the product in the purchaser's facilities, are covered by Norwest, for all types of
materials (oil sand, coal, base and precious metals, conventional oil and gas, coalbed methane, oil
shale, iron ore, potash, trona, and other industrial minerals).
This CPR has been prepared based on technical and economic review and analysis by a team of
consultants sourced from Norwest’s North American offices and, with respect to bitumen
extraction and processing, from the Calgary office of WorleyParsons and, with respect to port
facilities from the Houston office of Granherne. The Norwest consultants are specialists in the
fields of geology, computer modeling, resource and reserve estimation and classification, surface
mining, geotechnical engineering, hydrology, tailings management, infrastructure and mineral
economics.
The individuals listed below have provided input to this CPR and have extensive experience in
the mining industry. Where indicated, they are members in good standing of appropriate
professional associations.
Keith Wilson P. Eng. is Vice President, Mine and Mine Development with Norwest and
has practiced his profession as a surface mining engineer and project manager for over 19
years. He has specialized on both mineable oil sands and coal deposits to be mined using
either dragline or truck-and-shovel methods.
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Geoff Jordan, P. Geol., P. Geo. is a Senior Geologist with Norwest and has practiced his
profession as a mine and exploration for over 40 years for conventional and
unconventional oil and gas and coal.
Voytek Socha M. Sc. is a Senior Technical Advisor with Norwest and has practiced his
profession for over 25 years specializing in computer based mine planning and mine
design systems.
Greg MacMaster P. Eng. is Manager, Surface Mining with Norwest and has practiced his
profession as a surface mining engineer for over 25 years in the coal, oil sands, asbestos,
lead-zinc and copper industries. He specializes in open-pit mine design,
production/project scheduling and open pit economic assessments.
Ted Kizior P.Eng. is a Senior Process specialist engineer with Worley Parsons Canada
and has practiced his profession in Oil sands plants (operation) and projects (design),
mainly in extraction of bitumen from mined Oil Sands for over 35 years.
Herb Ghumman P.Eng. is Process Manager with Worley Parsons Canada and has
practiced his profession as a process and project engineer over 30 years in Oil and Gas
industry, including Oil Sands.
The CP who has supervised the production of this CPR is Mr. Keith Wilson who is Vice
President, Mine and Mine Development with Norwest and a mining engineer with over 19 year’s
experience in the mining industry.
Regards,
Keith Wilson, P. Eng.
KW/njw
315
Calgary, Alberta
T2G 4Y5
ES TOC - 1
ES 1 EXECUTIVE SUMMARY ...........................................................................ES 1
ES 1.2 Resource Estimates...............................................................................................................ES 2
ES 1.6 Bitumen Recovery.................................................................................................................ES 7
ES 1.15 Sensitivity Analysis: Replace Diesel with Bitumen for Power Generation..........................ES 15
ES 1.16 Sensitivity Analysis: Recovery, Capital Deferment And Startup Production Rates..........ES 17
ES 1.17 Extraction Recovery ............................................................................................................ES 19
ES 1.18 Grade Of Ore.......................................................................................................................ES 19
ES 1.20 Conclusions and Recommendations...................................................................................ES 20
ES TOC - 2
LIST OF TABLES
Table ES.1 Summary Table of Assets Madagascar Oil Ltd (MOIL) ................................................. ES-1
Table ES.2 Discovered and Undiscovered PIIP – Suitable for Surface Mining (millions of barrels) ... ES-3
Table ES.3 Summary of Gross and Net Contingent Resources As at June 30, 2010 ....................... ES-4
Table ES.4 Summary of Gross and Net Prospective Resources As at June 30, 2010 ..................... ES-5
Table ES.5 Project Capital $M....................................................................................................ES-9
Table ES.7 Mine Sustaining Capital Cost $M ............................................................................. ES-10
Table ES.8 Extraction Capital Cost $M......................................................................................ES-11
Table ES.9 Pipelines and Tanks Capital $M .......................................................................................ES-11
Table ES.10 Mining Operating Cost* Summary Years 1 to 40 ....................................................... ES-12
Table ES.11 Extraction Operating Cost Summary ........................................................................ ES-13
Table ES 12 Parameters and Assumptions ..........................................................................................ES-13
Table ES 13 Current Dollar Net Present Value ($M) ............................................................................ ES-14
Table Es 14 Constant Dollar Net Present Value ($M) ..........................................................................ES-14
Table ES 15 Base Case Current Dollar Break-Even Brent Price ..........................................................ES-15
Table ES 16 Base Case Constant Dollar Break-Even Brent Price .......................................................ES-15
Table ES 17 Fuel Replacement Sensitivity Current Dollar Net Present Value .....................................ES-16
Table ES 18 Fuel Replacement Sensitivity Current Dollar Break-Even Brent Price .............................ES-16
Table ES 19 Fuel Replacement Sensitivity Constant Dollar Net Present Value ...................................ES-16
Table ES 20 Fuel Replacement Sensitivity Constant Dollar Break-Even Brent Price ..........................ES-17
Table ES 21 Recovery Sensitivity Current Dollar Net Present Value ...................................................ES-18
Table ES 22 Recovery Sensitivity Current Dollar Break-Even Brent Price ...........................................ES-18
Table ES 23 Recovery Sensitivity Constant Dollar Net Present Value .................................................ES-19
Table ES 24 Recovery Sensitivity Constant Dollar Break-Even Brent Price.........................................ES-19
LIST OF FIGURES
318
ES - 1
Madagascar Oil Ltd. engaged Norwest Corporation (Norwest), with assistance from WorleyParsons
Canada Services Ltd. (WorleyParsons) and Granherne Inc. (Granherne), to prepare a Competent Person’s
Report (CPR) of the Bemolanga Oil Sand Project in accordance with the requirements of the AIM Rules
for companies (2010) and the AIM Guidance Note for Mining and Oil and Gas Companies (June 2009)
(AIM Guidance Note) for a proposed admission of ordinary shares of Madagascar Oil to trading on AIM.
The assets of the company are shown on Table ES.1 Norwest has not conducted any field work in
support of this assignment with the exception of a site visit which was completed by a Norwest senior
mining engineer in 2007. The location of the project is shown on Figure ES-1. The following report was
prepared using all data available up to June 30, 2010.
TABLE ES.1
exploitation period and
period
5,463
development
activities
Madagascar Oil’s title to the Bemolanga Property is a Profit Sharing Agreement (PSA) that was
concluded with the Republic of Madagascar in 2004 and which is held by Madagascar Oil Sarl. The PSA
addresses an area of 5,463 sq km that is referred to as “Block 3102”. The area of the is based on a map of
the area. Madagascar Oil Sarl. is a limited liability company registered in the Republic of Madagascar.
Since the completion of that agreement, the name of the company has been changed to Madagascar Oil
SA. Madagascar Oil SA is a wholly owned subsidiary of Madagascar Oil Ltd. (Bermuda). In 2008 Total
E&P Madagascar joined with Madagascar Oil in the exploration and development of the project. Total
acquired a 60% interest in the project and took over operational control at that time and initiated a multi-
year exploration and development campaign with the objective of assessing the economic merits of the
project.
The Bemolanga Oil Sand deposit is located in Madagascar about 170 km by road from the port of
Maintirano on the west coast. The concession covers a map area of about 5,463 km2 of which about 320
km2 have been explored by drilling in various exploration campaigns since 1950 that address the potential
to develop the bitumen deposits at this location. Please refer to Figure ES-2.
319
ES - 2
ES 1.1 GEOLOGY
The Bemolanga bitumen deposit is found in sandstone units of the Isalo II Formation and upper sandstone
beds of the older, Isalo I Formation, and is of Upper Triassic age. The sequence in the Bemolanga area
correlates with the Karroo sequence of Africa. The bitumen deposit occurs in four zones, three of which
are addressed in the present report. These sand units typically range from 9.0 m to 54.0 m thickness and
have an average grade on an ore interval basis of 5.35 wt% bitumen.
ES 1.2 RESOURCE ESTIMATES
This report addresses only about 320 sq. km. of the concession; there are additional areas that are not
addressed or included here. Resource definition is consistent with those of National Instrument 51-101
using the procedures specified in the COGE Handbook. This is a Canadian hydrocarbon resource
estimation standard that is internationally recognized. The geological in-place bitumen resource is
referred to as the Discovered and Undiscovered Petroleum Initially-In-Place (PIIP). These resource
quantities have been categorized in different confidence categories of “Low Estimate” which is the least
optimistic, “Best Estimate” and “High Estimate” which is the most optimistic. Parts of the property,
referred to as Pits 1 through 5, have been identified that are suitable for surface mining. The in place
Discovered and Undiscovered Resources in these surface mining areas are shown on Table ES.2.
The resource types are illustrated on the “Resource Classification Framework” illustration, Figure ES-3,
from the COGE Handbook (copied from SPE-PRMS, Figure 1-1). This illustration shows the relationship
between the in place and the recovered resource classifications. The resource category distribution at
Bemolanga is illustrated on Figure ES-4.
320
ES - 3
TABLE ES.2
BEMOLANGA PROJECT
(MILLIONS OF BARRELS)
Area Resource Class
Total 496 1,179 2,001
Total 562 1,005 1,927
No dilution, mining losses or plant recovery factors have been applied to this geological in-place resource estimate.
With respect to the above Discovered PIIP estimate it should be noted that that there is no certainty that it will be
commercially viable to produce any portion of the resources.
With respect to the above Undiscovered PIIP estimate it should be noted that that there is no certainty that any portion
of the resources will be discovered. If discovered there is no certainty that it will be commercially viable to produce any
portion of the resources.
A Total Volume to Bitumen-in-Place (TV/BIP) ratio value of 24 was used in a computer model of the
geology to determine these deposit limits. Mining and Processing of the in place ore results in recovery of
bitumen from the in place resource and incurs various operational losses. The estimate of recoverable
bitumen from the Discovered PIIP is referred to as the Contingent Resource. Likewise the estimate of
recoverable bitumen from the Undiscovered PIIP is referred to as the Prospective Resource. Both of these
recoverable bitumen resource estimates are categorized as Low. Best and High Estimates. Tables ES.3
and ES.4 which follow show the estimates, by pit area, of the Contingent and Prospective Resources.
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ES - 4
TABLE ES.3
BEMOLANGA PROJECT
AS AT JUNE 30, 2010
Million Bbls Gross (Total + MOIL) Net Attributable (MOIL Only)
Operator
MOIL)
Total for Bitumen (1)
Bitumen net of Royalty (2)
188 414 644 75 165 258
(1) Total bitumen net of fuel use. Royalty oil in the range from 4.5% to 10.0%, depending on the price of oil, is included in this
resource estimate. (2)
Total bitumen net of fuel use and royalty oil. For the purposes of this resource estimate, the 5% royalty oil is based on a
$70 Brent price and a constant dollar economic analysis. (3)
The estimates in the table do not include a risk factor. The COGE system provides for two approaches that are applicable
to deterministic resource and reserve estimates such as was completed for Bemolanga. The COGE handbook states that
“the uncertainty-based approach is more consistant with the COGEH reserves definintions and guidelines. The undertainty-based approach is strongly recommended over the risk-based approach”. Norwest estimates have been made
in accordance with this COGE recommendation.
With respect to the above Contingent Resource estimate it should be noted that there is no certainty that it
will be commercially viable to produce any portion of the resources. It should also be noted that there are
risks associated with recovery of this resource. These risks include, but are not limited to the possibility
that additional drilling will show lower, and uneconomic thickness of the ore and/or lower, and
uneconomic average bitumen grade than has been predicted at any future drill site; less efficient mining
and processing conditions for the ore; lower than forecast oil prices for the life of the operation. Any or all
of these conditions may prevent this resource from being commercially viable.
These bitumen volumes are classified as Contingent Resources, rather than Reserves, because certain
conditions for development, or contingencies, have yet to be met. The most important of these are that:
Madagascar Oil Ltd. still has to conduct drilling exploration and core testing to improve the
resource confidence level in the pit areas and to confirm the grade and mining conditions.
Further pilot test work has to be done to verify that the forecast process recovery will be
achieved.
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ES - 5
TABLE ES.4
BEMOLANGA PROJECT
AS AT JUNE 30, 2010
Million Bbls Gross (Total + MOIL) Net Attributable (MOIL Only)
Operator
MOIL)
Total for Bitumen (1)
Bitumen net of Royalty (2)
167 309 627 67 124 251
(1) Total bitumen net of fuel use. Royalty oil in the range from 4.5% to 10.0%, depending on the price of oil, is included in this
resource estimate. (2)
Total bitumen net of fuel use and royalty oil. For the purposes of this resource estimate, the 5% royalty oil is based on a
$70 Brent price and a constant dollar economic analysis. (3)
The estimates in the table do not include a risk factor. The COGE system provides for two approaches that are applicable
to deterministic resource and reserve estimates such as was completed for Bemolanga. The COGE handbook states that
“the uncertainty-based approach is more consistant with the COGEH reserves definintions and guidelines. The undertainty-based approach is strongly recommended over the risk-based approach”. Norwest estimates have been made
in accordance with this COGE recommendation.
With respect to the above Prospective Resource estimate it should be noted that there is no certainty that
any portion of the resources will be discovered. If discovered there is no certainty that it will be
commercially viable to produce any portion of the resources. It should also be noted that there are risks
associated with recovery of this resource. These risks include, but are not limited to the possibility that
additional drilling will show lower, and uneconomic thickness of the ore and/or lower, and uneconomic
average bitumen grade than has been predicted at any future drill site; less efficient mining and processing
conditions for the ore; lower than forecast oil prices for the life of the operation. Any or all of these
conditions may prevent this resource from being commercially viable. It should also be noted that the risk
associated with these Prospective Resources is greater than for the Contingent Resources due to the
greater distance from known geological conditions.
The recoverability criteria for the Contingent and Prospective Resources with respect to their in place
resource class are the same. This is because all of the in place ore is considered to be equally amenable to
mining producing equal portions of run-of-mine ore. Likewise the ore from which the Contingent and
Prospective Resources are recovered has the same average characteristics such that the processing
recovery is expected to be the same.
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ES - 6
ES 1.3 VERIFICATION, VALIDATION AND RELIANCE
This CPR is dependent on technical, financial and legal input. The technical information has been
provided by Madagascar Oil, and taken in good faith, to Norwest and WorleyParsons and Granherne. It
has not been independently validated by drilling and testing conducted and/or supervised by Norwest
and/or WorleyParsons and/or Granherne. However Norwest have reviewed the materials provided at
sufficient detail in order to prepare the included resource estimates.
Norwest, WorleyParsons and Granherne have placed reliance on Madagascar Oil that the following
information provided by Madagascar Oil is both valid and accurate for the purpose of compiling this
CPR:
All technical information;
That the legal ownership of all the mineral and surface rights has been verified and save as
disclosed in this CPR that no significant legal issues exist which would affect the likely validity
of a project and/or the mineral resources as reported herein.
In September 2010, Total completed an additional exploration program that included approximately 85
holes. The data and results from this program have not yet been analyzed and therefore have not been
used in the preparation of this report.
We are not, and in the course of our enquiries and the preparation of our report, have not become aware of
any data or fact provided by Madagascar Oil or omissions in the data provided by Madagascar Oil that
might have an effect on the contents of our CPR and extracts from it.
Neither Norwest Corporation, Worley Parsons nor Granherne nor any of their employees who are
participating in the preparation this report and who are acting the capacity of Competent Persons have any
share ownership in Madagascar Oil Ltd.or is otherwise being remunerated by way of a fee that is linked to
the admission or value of the applicant.
ES 1.4 PROJECT LAYOUT
The proposed development for the Bemolanga Oil Sand Deposit includes multiple processes arranged in
series at two separate locations in north-western Madagascar. The mine, primary extraction facilities,
froth treatment facilities and upgrading facilities are located inland at Bemolanga, immediately adjacent
to the deposit, and the port infrastructure is located near the coastal town of Maintirano. Illustration ES-5
is a schematic of the project components and infrastructure.
324
ES - 7
ES 1.5 MINING
Norwest developed mine designs using criteria and methods that are generally consistent with those that
are observed by the Alberta surface oil sands mining industry. In those instances where project
conditions proved to be materially different from those that are typical of the Alberta situation, Norwest
developed project specific criteria and methods for application in the Bemolanga mine design process.
Given the lower-grade characteristics of the Bemolanga deposit, when compared with typical bitumen
mining projects in Canada, and the fact that the extraction process will be designed to address lower
grades, Norwest chose to adopt a cut-off grade of 4.5%, based on reviews of the current and historic drill
hole ore grade profiles.
The analysis found that the project would breakeven at a TV/BIP of 24. This value was adopted for the
purposes of limiting the pit designs. The scale of the project and the in-place resource allowed for a life
of a minimum of 40 years.
Primary equipment specification and fleet sizing was developed from first principles in a manner
consistent with the generally accepted procedures used in Canada. The overburden thickness within the
pit limits is quite variable, and can be quite thin in many places. As a result, 27 m3 diesel hydraulic front
shovels were scheduled to mine waste. All of the remaining ore and waste material in the production
schedule that is not loaded by the hydraulic units will be loaded by 46 m3 class electric cable shovels.
Two haulage fleets have been specified; a 230 t fleet matched to the capability of the hydraulic shovels
and a 360 t fleet matched to the larger electric cable shovels. As with the hydraulic shovels, it was
assumed that the 230 t fleet will haul only waste material.
Geological descriptions and testing of samples show that the ore and interburden materials at Bemolanga
are consolidated. For the purposes of the study it has been assumed that 70% of the total mined material
will require blasting.
Illustrations ES-6 and ES-7 show the location of the ultimate mining pit areas and the composite mine
advance over the life of the project.
ES 1.6 BITUMEN RECOVERY
Many studies have been undertaken to evaluate a wide range of processes to extract bitumen from
Bemolanga oil sands. Companies involved in these studies include Elf Aquitane, Ingeco, Lurgi, Alberta
Research Council, WorleyParsons (Colt Engineering), and Alberta Oil Sands testing and Research
Authority (AOSTRA) to name just a few. Processes evaluated include retorting, solvent extraction
methods, water-based extraction methods, and combinations of these approaches.
325
ES - 8
Of the work conducted on the Bemolanga oil sands, the most relevant to the Alberta oil sand processes is
the work conducted by Alberta Research Council. The major conclusions from the work by the Alberta
Research Council and Ingeco are:
The Clark Hot Water Process worked satisfactorily on the Bemolanga samples.
Recoveries are comparable to those achieved on Athabasca oil sands for the higher grades
(>8%). Recoveries at the lower grades (<6%) appear to be higher than would be expected for
equivalent Athabasca oil sand materials.
Froth quality is extremely poor.
Recovery is temperature dependant. Optimum recovery appears to be in the 70o C to 75o C
range.
Assuming that these samples are representative of the total Bemolanga deposit, the implications from this
work for the Bemolanga bitumen extraction process are:
The Clark Hot Water process appears to be a suitable process for Bemolanga.
Secondary circuit performance is critical to achieving good overall recovery.
Recoveries in excess of the Alberta Energy and Utilities Board performance curve for
Athabasca oil sands appear to be achievable, particularly for the lower grade oil sands.
The poor froth quality may significantly affect froth treatment plant design and performance.
There has been no research to date concerning bitumen froth produced from Bemolanga oil sands; any
predictions of performance have to be based on the experience of others working with similar material. A
high temperature froth treatment process is proposed which should have some advantages on Bemolanga
material. It is operated at temperatures greater than 70o C to provide a lower viscosity at the operating
temperature and hence potentially reduce solvent/bitumen ratios. There are some claims that such a
process may also allow some control of asphaltene precipitation; so far, this has been demonstrated only
with single-stage, batch processes at a bench scale. It has yet to be proven in a continuous process at any
scale.
It is anticipated that such a flowsheet will produce a product that will be less than 0.3% water and less
than 0.1% solids.
The project would require a pre-production capital investment of $10,893M dollars (constant year 2010
US Dollars). Capital would be required for port and upgrading facilities, mining operations, the extraction
facilities and pipelines and tanks. Sustaining capital of $4,051M dollars primarily for the replacement of
mining equipment would be required during the production period of 40 years. A summary is shown in
Tables ES.5 below.
ES - 9
TABLE ES.5
BEMOLANGA PROJECT
Extraction 6,011 1,803
Total 10,893 4,051
An independent report addressing upgrading facilities and port infrastructure was prepared by Granherne
Inc. This report is attached as Appendix A. The economic analysis for the project incorporates the
capital and operating costs estimates developed by Granherne.
ES 1.9 MINING CAPITAL COSTS
All costs are shown in constant year 2010 US Dollars. Major mining equipment costs and life cycles
were estimated from Norwest’s internal database. Price estimates for the major mining equipment are
turnkey, and include land and ocean freight to the mine and erection. The number of units required
annually was calculated based on the scheduled material quantities and the estimated equipment
productivity rates.
Pre-production capital costs for this project were defined as all capital costs associated with the mine
plans until the end of Year 1, as well as all operating costs up to Year 1 immediately prior to the
production of first oil. This cost includes initial equipment capital purchases required to achieve the first
phase of production. A contingency of 25% was included for non-mining equipment capital in order to
account for items that may be required and cannot be identified due to the preliminary nature of the data.
A summary of the mining pre-production capital is shown in Table ES.6 below.
327
ES - 10
TABLE ES.6
BEMOLANGA PROJECT
Contingency $110
Total $1,262
Sustaining capital occurs from Year 2 onward, as mine equipment that has reached its specified operating
hour life is replaced. Major rebuilds to extend the expected life have not been included in the analysis,
but presents an opportunity as more detailed mine planning is conducted in the future.
Mine equipment sustaining capital costs are summarized in Table ES.7.
TABLE ES.7
BEMOLANGA PROJECT
Mining Equipment 2,419
ES 1.10 EXTRACTION CAPITAL COSTS
Extraction capital costs were based on recent cost experiences in Fort McMurray and applied on a per
train estimates for a two train system. All costs are shown in constant year 2010 US dollars. In
recognition of the lack of testing data in support of the extraction process, coupled with the uncertainty of
the delivered ore grade, it is difficult to assess the impact of the high tonnage capacity on the feed
preparation trains for the capital cost estimate. This uncertainty was considered in assigning the 30%
contingency allotment and -25%/+50% level of accuracy of the study.
Extraction capital is shown in Table ES.8 below.
328
ES - 11
TABLE ES.8
BEMOLANGA PROJECT
Contingency 7,814
Other facilities consist of a hot bitumen buffer storage tank, pumps, and facilities for brining in
diesel fuel and make-up solvent. The costs for pipelines, pumps and storage tanks are shown in
Table ES.9.
TABLE ES.9
BEMOLANGA PROJECT
Hot bitumen storage tank 4
Pumps 1
Total 77
Contingency 12
ES 1.11 MINING OPERATING COST
The mine operating cost analysis was conducted using Runge’s Xeras mine costing software. All costs
are shown in constant year 2010 US dollars. Norwest has estimated the cost for mining consumables
based on equipment operating parameters, contract rates for the activities and typical estimates for
indirect costs used in evaluating mining projects in Fort McMurray.
329
ES - 12
The labour operating cost estimates include mine operations, maintenance, tailings and staff personnel. In
addition to Western-world expatriate workers, Norwest assumes that expatriate operators and tradesmen
will be sourced from developing nations that have mining industries such as Indonesia or countries in
western Africa. Eventually, Madagascar nationals will provide the bulk of the hourly workforce after
undergoing proper training. The wage assumptions for these labour categories are based on Norwest’s
knowledge of labour costs in those areas and input from Madagascar Oil. The labour costs for Western-
world expatriate personnel required at Bemolanga are based on rates for Fort McMurray mining
personnel. It is assumed that Western-world expatriates in senior positions will be required for the life of
the project.
The level of accuracy associated with the cost estimate is plus 40% minus 15%. A 10% contingency was
included in the total operating cost estimate to account for costs that may not have been considered at this
preliminary stage due to the scarcity of data related to the location. Table ES.10 summarizes the life of
project operating costs.
Category
Annual
Average
$M
Sand $/BCM***
* Includes contingency.
** Bank Cubic Metres of oil sands + waste.
ES 1.12 EXTRACTION OPERATING COST
Extraction costs cover the extraction plant, conveyors, crushers, and tailings pipe and froth treatment.
The plant operating cost estimates were estimated based on manpower and energy requirements to
operate the plant. The assumption used for diesel fuel pricing is $0.57 per liter. The electrical power cost
for mine equipment, is assumed to be zero as the power is supplied from the project’s owner operated
generating facility.
Worley Parsons has estimated the cost for extraction consumables based on its knowledge of unit costs in
Fort McMurray. The estimates that the non-energy related consumables are $2.16/bbl in Fort McMurray,
which were increased to $2.29/bbl in Madagascar to account for extra freight cost. It was assumed that
5,100 bbls per day of diesel fuel will be required for the power generating facility, which provides a
portion of the process heating requirements. The cost of this fuel at $0.57 per liter or about $168 million
per year, is the energy consumable cost assigned to extraction. This works out to about $4.81/bbl. Most
330
ES - 13
of the heat will be provided by using some of the whole bitumen and asphaltenes provided to fire the
boilers, which reduces the bitumen available for upgrading.
In addition to Western-world expatriate workers, Worley parsons assumes that expatriate operators and
tradesmen will be sourced from developing nations that have mining industries such as Indonesia or
countries in western Africa. Eventually, Madagascar nationals will provide the bulk of the hourly
workforce after undergoing proper training. The wage assumptions for these labour categories are based
on past knowledge of labour costs in those areas. The labour costs for Western-world expatriate
personnel required at Bemolanga are based on rates for Fort McMurray mining personnel. It is assumed
that Western-world expatriate in senior positions will be required for the life of the project. Table ES.11
summarizes the life of project operating costs.
TABLE ES.11
BEMOLANGA PROJECT
ES 1.13 ECONOMIC ANALYSIS
The analysis was based on the following parameters and assumptions:
TABLE ES.12
BEMOLANGA PROJECT
Discount rates: 8%, 10%, and 12%;
Bemolanga discount to Brent: 30% FOB Bemolanga;
Diesel premium to Brent: 29% FOB Bemolanga;
Current Dollar Escalation: 3% per annum price and cost;
Full cycle evaluation date: From Year -8;
331
ES - 14
Royalty and cost recovery: Production Sharing Agreement April 29, 2004 and Amendment
No.1;and
Net present value economics shown on a before income tax basis.
The evaluation shows positive net present value under the current dollar scenario at $90 Brent and an 8%
discount rate. The corresponding constant dollar case at $90 is marginally uneconomic. The improvement
in economic returns under the current dollar evaluation is due to increased cash margins provided by
inflation. For example, the cash margin at the $70 Brent price averages about $19/bbl with constant dollar
conditions. With 3% escalation on both price and cost, the margin increases from $24 to over $55/bbl
over the life of the project and averages $42/bbl over the entire period. The net present value results are
shown below.
TABLE ES.13
BEMOLANGA PROJECT
Parameter Discount Rate
8% 10% 12%
Parameter Discount Rate
8% 10% 12%
ES 1.14 SENSITIVITY ANALYSIS: BREAK-EVEN PRICE
A break-even sensitivity analysis was performed for both the current and constant dollar evaluations at
the three discount rates. The break-even price is that price in 2010 which gives a net present value of zero
at the stated discount rate. At an 8% discount rate, a Brent price of $81.74, which is in the range of
currently prevailing prices, is required. The results are presented below.
332
ES - 15
TABLE ES.15
BEMOLANGA PROJECT
BASE CASE
Parameter Discount Rate
8% 10% 12%
$81.74 $95.45 $110.85
Parameter Discount Rate
8% 10% 12%
$100.36 $116.80 $134.83
ES 1.15 SENSITIVITY ANALYSIS: REPLACE DIESEL WITH BITUMEN FOR POWER GENERATION
The base plan presently utilizes diesel fuel for power generation. The possibility exists to burn bitumen
instead of diesel fuel. This would require different and possibly more boilers and turbines. It is estimated
that diesel fuel can be replaced 1:1 with bitumen, or 5,100 bpd. This would then result in the equivalent
amount in sales foregone.
Assuming that capital does not change, the results indicate that this strategy could achieve a positive net
present value at 8% and 10% with a Brent price of $90. It could reduce the break-even price by $6 to $8
per barrel in the constant dollar evaluation and by $7 to $9 per barrel in the current dollar analysis when
compared to the base case.
333
ES - 16
TABLE ES.17
BEMOLANGA PROJECT
Parameter Discount Rate
8% 10% 12%
Parameter Discount Rate
8% 10% 12%
$76.02 $88.70 $103.08
Parameter Discount Rate
8% 10% 12%
ES - 17
TABLE ES.20
BEMOLANGA PROJECT
Parameter Discount Rate
8% 10% 12%
ES 1.16 SENSITIVITY ANALYSIS: RECOVERY, CAPITAL DEFERMENT AND STARTUP PRODUCTION
RATES
Recoveries in Fort McMurray are typically in the range of 90%. If similar recoveries are achievable at
Bemolanga, bitumen production will increase correspondingly. However, the site will then require
additional equipment (cyclones and flotation cells) in the extraction unit and larger equipment in the froth
treatment unit with corresponding adjustments to utilities. The initial capital cost for the plant is estimated
to increase from $7,814 to $8,553 at 80% recovery and $8,886 million at 90% recovery. Assuming that
total operating costs are essentially the same at the higher recoveries (except for the diesel fuel at higher
or lower prices), unit operating costs (including storage, pumping and pipeline) will decrease from $9.57
to $7.89 and $6.88/bbl due to higher quantities of saleable bitumen. For the purposes of this sensitivity,
upgrading capital was also increased by the same percentage amount as extraction. Upgrading operating
costs were not reduced.
The project requires an initial capital investment of nearly $11 billion. If the final train was deferred to
Year+1, then up to $1.5 billion of capital could be delayed by one year. If ramp-up ore production was
also improved, then the loss of production from deferring the last train could be made-up from increased
oil sands production through the first three trains.
The sensitivity incorporating the above conditions indicates that in the current dollar analysis the net
present value could be positive for the 80% recovery case at a $90 Brent price at all discount rates and at
8% for $70 Brent. In the constant dollar analysis only the $90 price yields a positive net present value at
the 8% discount rate.
In the current dollar evaluation of the 90% recovery sensitivity case, positive net present values prevail at
$70 and $90 for all discount rates with the exception of $70 at 12%. In constant dollar terms, only the 8%
and 10% rates show a positive net present value at $90 while at $70, positive economics are found only at
8%.
335
ES - 18
The break-even Brent price could be reduced by $16 to $35/bbl for the current dollar evaluation and $19
to $41/bbl in the constant dollar evaluation, when compared to the base case, and depending on the
discount rate. The results are shown below.
TABLE ES.21
BEMOLANGA PROJECT
RECOVERY SENSITIVITY
Parameter
Parameter Discount Rate
8% 10% 12%
90.00% $56.09 $65.57 $76.36
ES - 19
TABLE ES.23
BEMOLANGA PROJECT
RECOVERY SENSITIVITY
Parameter
Parameter Discount Rate
8% 10% 12%
90.00% $69.51 $81.09 $93.80
ES 1.17 EXTRACTION RECOVERY
A small amount of laboratory-scale work was conducted on samples to assess the Clark Hot Water
Extraction process or its variants, but there has been no pilot testing to better delineate the anticipated
extraction recovery for the property.
ES 1.18 GRADE OF ORE
Section 3.9 of this report discusses the grade determination work that has been conducted on the
Bemolanga project to date, while future exploration work and laboratory testing programs are planned.
Norwest is optimistic that there is potential to improve the delivered grade of the ore zones by utilizing
the existing data, supplemented with the new information, to be more selective in the delineation of the
ore zone.
ES - 20
Selective mining within the ore zone will result in a higher projected ore grade than the ~5.5% utilized in
this study, which will have a significant positive impact on the proposed project. The impact will be
significant because a higher grade obviously results in more bitumen per tonne of ore processed, but the
gain in ore grade also results in better recovery during the extraction process.
ES 1.19 HEAT LOADING AND POWER GENERATION FUEL
For the purposes of this study, it was assumed that the mining, feed preparation and extraction power
requirements were satisfied through a diesel fuelled power generating facility. Approximately 18% of the
whole bitumen produced for the project was assumed to be utilized for fuel to generate heat for the
extraction process. Since Natural Gas is not a viable alternative in Madagascar at this time, these fuel
choices were a conservative assumption for the project necessitated by the time constraints associated
with the work. It is recommended that future evaluations of the Bemolanga Oil Sands Deposit consider
the utilization of alternative fuels such as Pet-Coke, bitumen or coal, for both power generation and the
heat loading requirements for the extraction process. The use of these alternative fuels will have a
significant impact on operating costs owing to the lower price per heat unit of these commodities
compared to diesel, and the large increase in whole bitumen that would report to froth treatment.
ES 1.20 CONCLUSIONS AND RECOMMENDATIONS
Exploration results to date have confirmed the presence of a significant oil sand resource on the
Bemolanga Oil Sand Project and estimates of the recoverable portions have been made. The Best
Estimate of Contingent Resources estimated from geological work completed to the present totals 435
Mbbls of bitumen. The Best Estimate of Prospective Resources estimated from the same geological work
completed to the present totals 325 Mbbls of bitumen.
At present the recoverable oil sand resources on the Bemolanga Oil Sands Project have been classed as
either Contingent Resources or Prospective Resources in accordance with the terminology of the COGE
Handbook. These bitumen volumes are classified as Contingent and Prospective Resources, rather than
Reserves, because certain conditions for development have yet to be met.
The first of these conditions relates to the density of drilling data. A significant portion of the resource is
classed as Prospective due to the drilling density. Madagascar Oil Ltd. has to conduct further drilling
exploration and core testing to improve the resource confidence level in the pit areas and to confirm the
grade and mining conditions. The second condition relates to the requirement for Madagascar Oil Ltd. to
conduct field scale pilot tests to verify the forecast process recovery that will be achieved.
It should be noted that in order to achieve the classification of Reserves, the deposit must be judged to be
economically recoverable. An increase in the density of drilling data and the acquisition of field scale
pilot test results may not result in the Bemolanga Oil Sands Project being classed as a Reserve.
338
ES - 21
In addition to meeting the conditions required for the classification of a Reserve, it is recommended that
Madagascar Oil Ltd. develop a lithologically based geological model that will allow for the
discrimination of ore and waste material within the ore zones. At present, the “zone” based geological
model does not provide for the discrimination of ore and waste material. This means that material that is
below the cut-off grade may have been included as ore.
We expect that selective mining within the ore zones to remove this separable material will result in a
higher projected ore grade than the grades utilized in this study. This will have a positive impact on the
proposed project. The impact will be positive because a higher grade obviously results in more bitumen
per tonne of ore processed. The gain in ore grade may also result in better recovery during the extraction
process.
The constant dollar economic analysis indicates that the project requires a break-even Brent price that is
higher than presently prevailing prices. In this case “break-even” means achieving returns in the range of
8% to 12%, under a constant dollar scenario.
In a current dollar analysis both price and cost are escalated at 3% and the increased cash margins
provided by inflation help to achieve better economic results. In such a case the project economics would
be favourable above a Brent price of $81.74/bbl, at the 8% discount rate. This is in the range of currently
prevailing prices. This improvement in economic returns under the current dollar evaluation is solely due
to increased cash margins provided by inflation.
The ability to enhance bitumen recovery could have a positive impact on project economics. Under a
current dollar evaluation (with 3% price and cost inflation) improving recoveries to levels of 80% to 90%
reduces the required Brent price to currently prevailing prices to achieve returns of 8% to 12%. At an
80% recovery, $70 Brent pricing, and 8% discount rate, the project net present value increases from
($2,060 M) to $905 M, a positive change of $2,965 M. At a 90% recovery, the project net present value
increases to $3,802, a positive change of $5,862 M. Therefore all efforts to increase bitumen recovery
should be pursued.
Calgary, Alberta
T2G 4Y5
TOC - 1
1.3 DATA SOURCES...........................................................................................................1-2
1.5 PROJECT LAYOUT........................................................................................................1-8
2 OVERVIEW OF THE REGION, LOCATION AND ASSETS ...............................................2-1
2.1 DESCRIPTION OF ASSETS ............................................................................................ 2-1
2.2 PRODUCTION RIGHTS, RESOURCE OWNERSHIP AND REVENUE SHARING ...................... 2-1
2.3 DESCRIPTION OF RECLAMATION, ENVIRONMENTAL AND OTHER LIABILITIES ................... 2-2
2.4 CP INTERESTS ............................................................................................................ 2-3
3 PROPERTY ATTRIBUTES ................................................................................................. 3-1
3.2 ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY 3-1
3.3 HISTORY ..................................................................................................................... 3-3
3.4 EXPLORATION ............................................................................................................. 3-4
3.6.1 Regional Stratigraphy .................................................................................. 3-7 3.6.2 Regional Tectonics and Deposition ............................................................. 3-8 3.6.3 Local Faulting ............................................................................................... 3-8 3.6.4 Igneous Intrusions ........................................................................................ 3-9
3.7 DEPOSIT TYPE ............................................................................................................ 3-9
3.8 PETROLEUM ENRICHMENT ......................................................................................... 3-11
3.9 BITUMEN PROPERTIES, ANALYSIS AND TESTING ......................................................... 3-12
3.9.1 Historic Testing and Analysis ..................................................................... 3-12 3.9.2 Current Testing and Analysis ..................................................................... 3-17 3.9.3 Data and Analysis Verification ................................................................... 3-18
4 RESERVES AND RESOURCES ........................................................................................ 4-1
4.1 CHARACTERISTICS ...................................................................................................... 4-1
4.3 RECOVERABLE RESOURCE TYPES ............................................................................... 4-3
4.4 RESOURCES CATEGORIES ........................................................................................... 4-3
4.6 THE BEMOLANGA OIL SAND SURFACE MINING RESOURCE AREAS.................................4-5
4.7 RESOURCES DIMENSIONS, QUANTITIES AND GRADE ..................................................... 4-6
4.7.1 In place Estimate of Discovered PIIP and Undiscovered PIIP ..................... 4-6
348
TOC - 2
4.7.2 Estimates of Contingent and Prospective Resources .................................. 4-7 5 THE DEVELOPMENT CONCEPT – MINING ..................................................................... 5-1
5.1 MINING MODEL ............................................................................................................ 5-1
5.1.1 Ore Cut-Off Grade ....................................................................................... 5-1 5.1.2 Minimum Mining Thickness .......................................................................... 5-2 5.1.3 Mining Dilution ............................................................................................. 5-2
5.2 MINE DESIGN CRITERIA ............................................................................................... 5-2
5.3 BEMOLANGA ULTIMATE PIT DESIGNS ........................................................................... 5-3
5.3.1 Economic Limiting Criteria ........................................................................... 5-3 5.3.2 Pit Limits – Bemolanga ................................................................................ 5-4
5.4 PRODUCTION SCHEDULE ............................................................................................. 5-5
5.6 MATERIAL BALANCE .................................................................................................... 5-7
5.7.1 Loading Equipment ...................................................................................... 5-8 5.7.2 Haulage Equipment ................................................................................... 5-10
5.8 OTHER MINING EQUIPMENT ....................................................................................... 5-10
5.9 MINE EQUIPMENT OPERATING PARAMETERS .............................................................. 5-11
5.10 MINE EQUIPMENT AVAILABILITY ............................................................................ 5-14
5.11 DRILLING & BLASTING...........................................................................................5-14
5.12 WORKFORCE - MINING..........................................................................................5-15
5.12.1 Labour Available for Productive Work ........................................................ 5-15 5.12.2 Mine Workforce Levels .............................................................................. 5-16
5.13 CAPITAL COST ESTIMATE - MINING ....................................................................... 5-19
5.13.1 Mine Equipment ......................................................................................... 5-19 5.13.2 Ancillary Equipment ................................................................................... 5-20 5.13.3 Other Mine Capital ..................................................................................... 5-20 5.13.4 Contract Activities ...................................................................................... 5-21 5.13.5 Pre-Production Capital ............................................................................... 5-21 5.13.6 Mine Sustaining Capital Cost ..................................................................... 5-21
5.14 OPERATING COST ESTIMATE - MINING .................................................................. 5-22
5.15 MINE EQUIPMENT ................................................................................................. 5-22
5.17.1 Expatriate and Madagascar Labour Costs ................................................. 5-25 5.17.2 Expatriate Repatriation and Madagascar Workforce ................................. 5-27
5.18 MINE ADMINISTRATION AND OVERHEADS .............................................................. 5-32
5.18.1 Office Costs ............................................................................................... 5-32 5.18.2 Travel ......................................................................................................... 5-32
349
TOC - 3
5.18.3 Safety and Training .................................................................................... 5-32 5.18.4 Recruitment ................................................................................................ 5-32 5.18.5 Building Maintenance ................................................................................. 5-32
5.19 OPERATING COST SUMMARY ................................................................................ 5-32
6 THE DEVELOPMENT CONCEPT - BITUMEN RECOVERY ............................................. 6-1
6.1 PROCESSING CONCEPTS ............................................................................................. 6-1
6.2 PROCESSING OPERATIONS .......................................................................................... 6-1
6.3 BITUMEN EXTRACTION ................................................................................................. 6-2
6.4 FROTH TREATMENT ..................................................................................................... 6-4
6.6 LABOUR AVAILABLE FOR PRODUCTIVE WORK ............................................................... 6-6
6.7 EXTRACTION WORKFORCE LEVELS .............................................................................. 6-7
6.8 CAPITAL COST ESTIMATE – BITUMEN EXTRACTION ....................................................... 6-7
6.9 CONCLUSIONS.............................................................................................................6-9
8 ECONOMIC ANALYSIS, SENSITIVITY ANALYSES AND RISK ...................................... 8-1
8.1 ECONOMIC ANALYSIS .................................................................................................. 8-1
8.2 SENSITIVITY ANALYSIS: BREAK-EVEN PRICE ................................................................ 8-2
8.3 SENSITIVITY ANALYSIS: REPLACE DIESEL WITH BITUMEN FOR POWER GENERATION ...... 8-3
8.4 SENSITIVITY ANALYSIS: RECOVERY, CAPITAL DEFERMENT AND STARTUP PRODUCTION
RATES ..................................................................................................................................8-4
9 CONCLUSIONS AND RECOMMENDATIONS .................................................................. 9-1
LIST OF APPENDICES
LIST OF TABLES
Table 1.2 Discovered and Undiscovered PIIP – Suitable for Surface Mining
(millions of barrels) ..................................................................................................1-5
Table 1.3 Summary of Gross and Net Contingent Resources As at June 30, 2010 ............... 1-6
Table 1.4 Summary of Gross and Net Prospective Resources As at June 30, 2010 ............. 1-7
Table 3.1 Block 3102 Concession ...........................................................................................3-1
Table 3.2 Summary of Drill Programs ..................................................................................... 3-7
350
TOC - 4
Table 3.3 Comparison of Soxhlet versus Fisher Assay Results ........................................... 3-14
Table 3.4 Summary of Bitumen and Oil Sand Properties ..................................................... 3-15
Table 4.1 Discovered and Undiscovered PIIP – Suitable for Surface Mining
(millions of barrels) ..................................................................................................4-7
Table 4.2 Summary of Gross and Net Contingent Resources As at June 30, 2010 .............. 4-9
Table 4.3 Summary of Gross and Net Prospective Resources ............................................. 4-10
Table 5.1 Final Pit Design Characteristics .............................................................................. 5-5
Table 5.2 Production Schedule ...............................................................................................5-6
Table 5.4 Material Balance Summary ..................................................................................... 5-9
Table 5.5 Use of Availability Summary ................................................................................. 5-13
Table 5.6 Example Calculation of NOH ................................................................................ 5-13
Table 5.7 Mine Equipment Operating Parameters ................................................................ 5-14
Table 5.8 Non-Production Workforce .................................................................................... 5-17
Table 5.9 Staffing Level Build-up ..........................................................................................5-18
Table 5.10 Equipment Unit Capital Cost ................................................................................. 5-20
Table 5.11 Mining Pre-Production Capital $M ........................................................................ 5-21
Table 5.12 Mine Sustaining Capital Cost $M .......................................................................... 5-22
Table 5.13 Mine Equipment Operating Cost Parameters ....................................................... 5-23
Table 5.14 Consumable Costs – Mining ................................................................................. 5-24
Table 5.15 Mine Wage Earner Labour Costs..........................................................................5-24
Table 5.16 Mine Staff Labour Costs ........................................................................................5-25
Table 5.17 Mining Ex-Pat and Nationals Wage Labour Cost .................................................. 5-26
Table 5.18 Mining Ex-Pat and Nationals Staff Labour Cost .................................................... 5-27
Table 5.19 Mining Nationals % of Hourly Workforce .............................................................. 5-28
Table 5.20 Mining Western Ex-Pats, African Ex-Pats, Nationals % of Staff ........................... 5-29
Table 5.21 Mining Labour Cost Adjustment Factors Fort McMurray to Madagascar .............. 5-32
Table 5.22 Operating Cost Summary Years 1 to 40 ............................................................... 5-33
Table 6.1 Bitumen Recovery using the Clark Process ............................................................ 6-3
Table 6.2 Summary of Bitumen Properties ............................................................................. 6-5
Table 6.4 Extraction Per Train Capital Cost $M ...................................................................... 6-8
Table 6.5 Pipelines and Tanks Capital Cost ($M) ................................................................... 6-9
Table 6.6 Extraction Operating Cost Summary .....................................................................6-10
Table 8.1 Parameters and Assumptions ................................................................................. 8-1
Table 8.2 Current Dollar Net Present Value ($M) ................................................................... 8-1
Table 8.3 Constant Dollar Net Present Value ($M) ................................................................. 8-2
Table 8.4 Base Case Current Dollar Break-Even Brent Price ................................................. 8-2
Table 8.5 Base Case Constant Dollar Break-Even Brent Price .............................................. 8-2
Table 8.6 Fuel Replacement Sensitivity Current Dollar Net Present Value ($M) .................... 8-3
351
TOC - 5
Table 8.7 Fuel Replacement Sensitivity Current Dollar Break-Even Brent Price .................... 8-3
Table 8.8 Fuel Replacement Sensitivity Constant Dollar Net Present Value ($M) ................. 8-4
Table 8.9 Fuel Replacement Sensitivity Constant Dollar Break-Even Brent Price ................. 8-4
Table 8.10 Recovery Sensitivity Current Dollar Net Present Value ($M) .................................. 8-5
Table 8.11 Recovery Sensitivity Current Dollar Break-Even Brent Price .................................. 8-6
Table 8.12 Recovery Sensitivity Constant Dollar Net Present Value ($M) ............................... 8-6
Table 8.13 Recovery Sensitivity Constant Dollar Break-Even Brent Price ............................... 8-6
LIST OF FIGURES
Figure 1-2 General PSA Location Map
Figure 1-3 Project Area Map
Figure 1-4 Project & Pit Areas
Figure 1-5 Project Arrangement Schematic
Figure 3-1 Topography and Drillhole Distribution Map
Figure 3-2 Stratigraphy of the Belmolanga Oil Sands Project Area
Figure 3-3 Stratigraphic Column
Figure 3-4 Geology Map
Figure 3-6 Base of Zone 2 Structure
Figure 3-7 Zone 1 Isopach Map
Figure 3-8 Zone 2 Isopach Map
Figure 3-9 Zone 3 Isopach Map
Figure 3-10 Area VI Ore Zone Correlation
Figure 3-11 Grade Comparison 2009 ASPEC Analysis vs. Dean Stark
Figure 3-12 Zone 1 Bitumen Grade Map
Figure 3-13 Zone 2 Bitumen Grade Map
Figure 3-14 Zone 3 Bitumen Grade Map
Figure 4-1 Resource Classification Framework
Figure 4-2 TV: BIP Ratio Map
Figure 4-3 Resource Classification Map
Figure 5-1 Ultimate Pit Designs
Figure 5-2 Composite Mine Advance
Figure 5-3 Year 0 – Mine Advance
Figure 5-4 Year 1 – Mine Advance
Figure 5-5 Year 2 – Mine Advance
Figure 5-6 Year 3 – Mine Advance
Figure 5-7 Year 4 – Mine Advance
352
TOC - 6
Figure 6-3 Froth Treatment
1-1
Services Ltd. (WorleyParsons) and Granherne Inc. (Granherne), to prepare a Competent Person’s
Report (CPR) of the Bemolanga Oil Sand Project in accordance with the requirements of the AIM
Rules for companies (February 2010) and the AIM Guidance Note for Mining and Oil and Gas
Companies (June 2009) (AIM Guidance Note) for a proposed admission of ordinary shares of
Madagascar Oil to trading on AIM, a market operated by the London Stock Exchange plc
(“AIM”). The location of the project is shown on Figure 1-1. The following report was prepared
using all data available up to June 30, 2010.
The CPR contains several major components that includes corporate assets and liabilities,
geology of the deposit, reserves and resources, mining, bitumen processing and economic
analysis. Norwest has prepared the majority of the report with the exception of those portions that
address bitumen processing and the part of the economic analysis that is concerned relates to
bitumen upgrading costs and related topics. The bitumen upgrading topics and the economic
analysis related to this aspect have been prepared by WorleyParsons. The port and facilities and
economic analysis related to this aspect have been prepared by Granherne.
Norwest has not conducted any field work in support of this assignment with the exception of a
site visit which was completed by a Norwest senior mining engineer in 2007.
1.2 REPORT SCOPE AND TERMS OF REFERENCE
The terms of reference for this CPR are to produce a report that is consistent with the AIM
Guidance Note. In addition to a description of the assets and liabilities of Madagascar Oil Ltd.,
the report must provide more than the minimum requirements and sufficient additional
information so that Madagascar Oil’s participation in the project can be well understood. The
objectives in this regard are as follows:
Report on the preparation of mining and geological models and other data for the Bemolanga
Oil Sand Property using historic and new drillhole and other exploration data.
Report on the use of the models to develop a mine plan and production sequence in
accordance with appropriate recovery estimates and local economic conditions.
Incorporate a process engineering assessment for bitumen upgrading of the deposit.
Report on Bitumen Reserves and Resources.
Prepare an economic study and report.
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The following report includes estimates of in-place bitumen Resources and Resources of bitumen
that may be recovered using surface mining methods. The estimates are presented in conformity
with the requirements of Canada’s National Instrument 51-101 standards which are
internationally recognised. NI 51-101 specifies that procedures described in the Canadian Oil and
Gas Evaluation (COGE) Handbook be used for the reporting of bitumen and other hydrocarbon
Reserves and Resources. All quantities of oil sand and contained bitumen are presented as
resources.
1.3 DATA SOURCES
This report and the various analyses that accompany it were based on various different data
sources. These include the records of historic drilling that have been assembled over the past
decades. These records are public and are maintained in government archives under the direction
and supervision of the Madagascar Department OMNIS. They include:
Logs and analytical test results from various drilling campaigns. Many of the logs are written
descriptions but there are some geophysical logs that were produced for several oil wells
drilled in the area.
Tables of analytical results of bitumen and rock testing.
Numerous written reports on geology, mining, bitumen processing, hydrology and various
other topics.
Despite the great extent of these records, they are rarely complete and the quality of the
reproductions is very poor in many instances. In addition there are a great number of exploration
activities that have been completed in the past and for which there are no records of the location
where work was done, the results obtained or even descriptions of the program that was
undertaken.
Source data also includes modern records of drilling and testing for the exploration completed by
Madagascar Oil in 2008 and by Total E&P Madagascar, Madagascar oil’s partner in this project,
in 2009. These include very comprehensive and detailed geophysical logs, extensive and
complete analytical data records, high quality and detailed maps for topography and other aspects
and reports on various specific technical investigations that are part of the oil sand evaluation.
Many of these documents were made available to Norwest for its use in the preparation of this
report but some have yet to be released to Madagascar Oil.
Sections 3 through 6 of this report include detailed descriptions of these data and their use for
various different technical aspects of study of the geology, mining and bitumen resources of the
deposit.
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In September 2010, Total completed an additional exploration program that included
approximately 85 holes. The data and results from this program have not yet been analyzed and,
therefore have not been used in the preparation of this report.
1.4 RESERVES AND RESOURCES
The following statements and estimates of bitumen resources have been prepared in accordance
with the Canadian standards described in National Instrument 51-101. A detailed discussion of
the procedures used and the criteria that apply are provided in Section 4. NI 51-101 requires that
the criteria and procedures of the Canadian Oil and Gas Evaluation (COGE) Handbook be used
for the public disclosure of reserves and resources of hydrocarbon deposits, including bitumen. In
the following discussion recoverable bitumen quantities are estimated. These estimates require
consideration of the effects of mining losses, dilution and recovery factors. These issues are
described in detail in the sections of the report under the heading “Development Concept” which
follow in Sections 5 and 6.
The bitumen resources at Bemolanga occur in several ore zones three of which have been
sufficiently explored for estimates of bitumen resources to be made. The area for resource
estimation is located within Block 3102, illustrated on Figure 1-2, which is the area to which
Madagascar Oil has legal title to the resource under the terms of a Profit Sharing Agreement
established with the government of Madagascar. Madagascar Oil’s partner, Total E&P
Madagascar, now holds a majority, 60% stake in this venture and is the operator of the project.
Table 1.1 is a Summary Table of Assets for Madagascar Oil Ltd.
TABLE 1.1
BEMOLANGA PROJECT
followed by a 25 year exploitation period and
then five year extensions for a further 25 year
period
5,463
program to be completed through 2010, followed by
development activities
From place to place on the block, there are bitumen enriched geological units or zones that are
suitable for extraction of the bitumen ore by surface mining methods. The mined bitumen ore
requires processing at a facility to be built near the mining area, to extract the bitumen and to
convert it to a form that can be transported and sold.
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1-4
The Bemolanga Oil Sand deposit is located in Madagascar about 170 km by road from the port of
Maintirano on the west coast. The concession covers an area of 5,463 km2 of which about 320
km2 have been explored by drilling in various exploration campaigns since 1950 that address the
potential to develop the bitumen deposits at this location.
The Bemolanga bitumen deposit is found in sandstone units of the Isalo II Formation and upper
sandstone beds of the older, Isalo I Formation, and is of Upper Triassic age. The sequence in the
Bemolanga area correlates with the Karroo sequence of Africa. The bitumen deposit occurs in
four zones, three of which are addressed in the present report. These sand units typically range
from 9.0 m to 54.0 m thickness and have an average grade on an ore interval basis of 5.35 wt%
bitumen.
This report addresses only about 320 sq. km of the concession, as illustrated on Figure 1-3; there
are additional areas that are not addressed or included here. Resource definition is consistent with
those of National Instrument 51-101 using the procedures specified in the COGE Handbook. This
is a Canadian hydrocarbon resource estimation standard that is internationally recognized. The
geological in-place bitumen resource is referred to as the Discovered and Undiscovered
Petroleum Initially-In-Place (PIIP). These resource quantities have been categorized in different
confidence categories of “Low Estimate” which is the least optimistic, “Best Estimate” and “High
Estimate” which is the most optimistic. Parts of the property, referred to as Pits 1 through 5, have
been identified that are suitable for surface mining. The in place Discovered and Undiscovered
Resources in these surface mining areas is shown on Table 1.2. These pit areas are illustrated on
Figure 1-4.
1-5
(MILLIONS OF BARRELS)
Area Resource Class
Total 496 1,179 2,001
Total 562 1,005 1,927
No dilution, mining losses or plant recovery factors have been applied to this geological in-place resource estimate.
With respect to the above Discovered PIIP estimate it should be noted that that there is no certainty that it will be commercially viable to produce any portion of the resources.
With respect to the above Undiscovered PIIP estimate it should be noted that that there is no certainty that any portion of the resources will be discovered. If discovered there is no certainty that it will be commercially viable to produce any portion of the resources.
A Total Volume to Bitumen-in-Place (TV/BIP) ratio value of 24 was used in a computer model of
the geology to determine these deposit limits. Mining and Processing of the in place ore results in
recovery of bitumen from the in place resource and incurs various operational losses. The
estimate of recoverable bitumen from the Discovered PIIP is referred to as the Contingent
Resource. Likewise the estimate of recoverable bitumen from the Undiscovered PIIP is referred
to as the Prospective Resource. Both of these recoverable bitumen resource estimates are
categorized as Low. Best and High Estimates. Tables 1.3 and 1.4 which follow show the
estimates, by pit area, of the Contingent and Prospective Resources.
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AS AT JUNE 30, 2010
Million Bbls Gross (Total + MOIL) Net Attributable (MOIL Only)
Operator
MOIL)
Total for Bitumen (1)
Bitumen net of Royalty (2)
188 414 644 75 165 258
(1) Total bitumen net of fuel use. Royalty oil in the range from 4.5% to 10.0%, depending on the price of oil, is included in this
resource estimate. (2)
Total bitumen net of fuel use and royalty oil. For the purposes of this resource estimate, the 5% royalty oil is based on a
$70 Brent price and a constant dollar economic analysis. (3)
The estimates in the table do not include a risk factor. The COGE system provides for two approaches that are applicable
to deterministic resource and reserve estimates such as was completed for Bemolanga. The COGE handbook states that
“the uncertainty-based approach is more consistant with the COGEH reserves definintions and guidelines. The uncertainty-based approach is strongly recommended over the risk-based approach”. Norwest estimates have been made
in accordance with this COGE recommendation.
With respect to the above Contingent Resource estimate it should be noted that there is no
certainty that it will be commercially viable to produce any portion of the resources. It should
also be noted that there are risks associated with recovery of this resource. These risks include,
but are not limited to the possibility that additional drilling will show lower, and uneconomic
thickness of the ore and/or lower, and uneconomic average bitumen grade than has been predicted
at any future drill site; less efficient mining and processing conditions for the ore; lower than
forecast oil prices for the life of the operation. Any or all of these conditions may prevent this
resource from being commercially viable.
These bitumen volumes are classified as Contingent Resources, rather than Reserves, because
certain conditions for development, or contingencies, have yet to be met. The most important of
these are that Madagascar Oil Ltd. still has to conduct drilling exploration and core testing to
improve the resource confidence level in the pit areas and to confirm the grade and mining
conditions and further pilot test work has to be done to verify that the forecast process recovery
will be achieved.
1-7
AS AT JUNE 30, 2010
Million Bbls Gross (Total + MOIL) Net Attributable (MOIL Only)
Operator
MOIL)
Total for Bitumen (1)
Bitumen net of Royalty (2)
167 309 627 67 124 251 (1)
Total bitumen net of fuel use. Royalty oil in the range from 4.5% to 10.0%, depending on the price of oil, is included in this
resource estimate. (2)
Total bitumen net of fuel use and royalty oil. For the purposes of this resource estimate, the 5% royalty oil is based on a
$70 Brent price and a constant dollar economic analysis. (3)
The estimates in the table do not include a risk factor. The COGE system provides for two approaches that are applicable
to deterministic resource and reserve estimates such as was completed for Bemolanga. The COGE handbook states that
“the uncertainty-based approach is more consistant with the COGEH reserves definintions and guidelines. The uncertainty-based approach is strongly recommended over the risk-based approach”. Norwest estimates have been made
in accordance with this COGE recommendation.
With respect to the above Prospective Resource estimate it should be noted that there is no
certainty that any portion of the resources will be discovered. If discovered, there is no certainty
that it will be commercially viable to produce any portion of the resources. It should also be noted
that there are risks associated with recovery of this resource. These risks include, but are not
limited to the possibility that additional drilling will show lower, and uneconomic thickness of the
ore and/or lower, and uneconomic average bitumen grade than has been predicted at any future
drill site; less efficient mining and processing conditions for the ore; lower than forecast oil prices
for the life of the operation. Any or all of these conditions may prevent this resource from being
commercially viable. It should also be noted that the risk associated with these Prospective
Resources is greater than for the Contingent Resources due to