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
310
PAGE 2 OF 6
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
312
PAGE 4 OF 6
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
313
PAGE 5 OF 6
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.
314
PAGE 6 OF 6
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.
321
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.
322
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.
323
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.
354
1-2
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.
355
1-3
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.
356
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.
358
1-6
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