Financial Times: Paradise lost

EXTRACT: Exxon is not alone. Royal Dutch Shell, the Anglo-Dutch energy group, for example, is investing more than $10bn, withstanding Arctic conditions, and re-routing pipelines away from the feeding areas of grey whales, to pull oil and gas from Russia’s eastern Sakhalin Island, a place Anton Chekhov described as “hell”. Madagascar’s cyclone-prone seas may seem tame in comparison, but the country has its share of onshore challenges.

Chekhov’s idea of hell may be Sakhalin Island, but mine is Nigeria. More than 50 years of oil “wealth” has turned Africa’s biggest oil exporter into a place in which one cannot check in to a hotel without being bribed; where rebels hold oil executives hostage and villagers are so poor that they are willing to risk blowing themselves up stealing petrol from pipelines that run across their fields.

THE ARTICLE

By Carola Hoyos

Published: September 9 2006 03:00 | Last updated: September 9 2006 03:00

For months a small Chinese boat, the Bin Hai 517, has been travelling at a steady 8 knots off the north-west coast of Madagascar. It fires an air gun every few seconds, and the short bursts of sound bounce back from the rock below. The boat is easy to spot from the sky – it drags hydrophones for 4km behind its stern.

The Chinese boat stops for nothing but the odd school of dolphins attracted to its whirlpool wake. Its mission is to search for buried treasure: the world’s last undiscovered giant oilfield outside the Arctic may be under these waters.

Since the first oil rush began in Titusville, Pennsylvania, in the late 1850s, adventurous men seeking their fortune have fanned out across the globe hunting for black gold. They have drilled so many wells, an oil industry saying goes, that the world now resembles a wheel of Swiss cheese.

In the past few years the oil world has been forced to return to its adventurous, risk-taking roots. Already facing instability in the Middle East, and dwindling supplies from old-established oilfields in the North Sea and the Gulf of Mexico, the oil giants were then hit by the challenge of China’s economic boom. As recently as 1993, China was self-sufficient in oil. It is now the world’s second-largest importer, after the US. China has sent its national oil companies out to secure supplies, and they have done so chiefly by quietly offering the highest prices for fields around the world.

These events have forced ExxonMobil and its peers to adopt a more adventurous strategy. For the first time since the early 20th century, they are aggressively searching for oil in frontier places, where the chances of successful extraction may be just 10 per cent. By a small but growing crowd, Madagascar is seen as the most promising of these far-flung destinations. Its bars and hotels are full of oilmen, chancers and old-fashioned explorers.

Until recently, Madagascar, stuck in the Indian Ocean, had escaped the attention of oil-industry drills. The giant companies did come to the island in the early 1980s, but the results were disappointing. The teams found a small amount of natural gas, but no oil. “The industry just passed it by,” says Tim Cejka, president of exploration at ExxonMobil, the world’s largest listed oil and gas group.

The Malagasy holes were quickly plugged and the data forgotten at the back of oil company storerooms. By the early 1980s oil prices had spiked because of the overthrow of the Shah in Iran, but there was little any oil company could do with natural gas so far away from the markets of Europe, the US and Asia.

But in 2002 researchers sifting through ExxonMobil’s vast databases stumbled across the Madagascar file. They examined the data and realised that the rock formations that make up the island and its offshore basins had all the characteristics needed to create oil.

The so-called “source rock” was shale, perfect for cooking plant and animal matter into oil as the pressure and heat mounts over millions of years. The next layers were sand and limestone, porous enough to soak it up and store it like a sponge. But the vital thing no one had detected in the 1980s was that the whole reservoir was sealed with salt, which trapped the oil from flowing to the earth’s surface and getting lost at sea. Other great salt basins have yielded vast riches in the west African waters of Nigeria and Angola.

The elements were all there, and with today’s superior drilling technology even oil trapped 3,000m below the surface of the sea is within reach. Exxon’s negotiations team set off to secure the rights to search for oil. “It was something hard to resist,” Cejka, a jovial Pennsylvanian, says.

But the Exxon team wasn’t the first expedition to reach Madagascar’s waters. On the other end of the Texas oil industry food chain, a small outfit called Vanco Energy had beaten the $400bn giant to the deal.

Vanco’s president, Gene van Dyke, an eccentric Houstonian who has made his fortune buying cheap rights to unlikely oilfields, had already bought the block from the Malagasy government. In August 2004, he agreed to sell Exxon a 40 per cent stake, and, a year later, Exxon extended its reach into the two neighbouring blocks owned by Sterling Energy, the small UK company which organised my hair-raising flight over the Chinese oil-seeking boat.

As part of the deal with Sterling, Exxon, with its $36bn cash pile, agreed to pay for a large part of the Malagasy exploration programme. “We will have spent over $100m before we have a single answer. I could tell you this is going to be the next moon, but we don’t know. Is it a North Sea, a Gulf of Mexico? I don’t know. That’s the whole excitement of working on a frontier,” Cejka says.

Many of the world’s remaining oil reserves are hidden away in countries that do not allow foreigners a piece of the action. Other big petrostates, such as Iran and Iraq, are failing to attract investment for geopolitical reasons.

Because of Exxon’s sheer size, Cejka and his team must find 1.5 billion barrels of oil reserves each year just to stop the company from shrinking. Small fields make little sense for a company that pumps more than 4 million barrels a day. (That’s enough oil to keep Germany and India’s economies humming.) So, as places such as the North Sea and Alaska run out of traditional, easy-to-extract oil reserves, Exxon is having to move into remoter, riskier and more hostile territory to spend its war chest, now bulging from the riches that come with $70-a-barrel oil.

Exxon is not alone. Royal Dutch Shell, the Anglo-Dutch energy group, for example, is investing more than $10bn, withstanding Arctic conditions, and re-routing pipelines away from the feeding areas of grey whales, to pull oil and gas from Russia’s eastern Sakhalin Island, a place Anton Chekhov described as “hell”. Madagascar’s cyclone-prone seas may seem tame in comparison, but the country has its share of onshore challenges.

A French colony from 1896 until 1960, Madagascar’s shaky post- occupation prosperity lasted little more than 15 years. On June 15 1975, Admiral Didier Ratsiraka was installed by military directorate as the head of state and president. He quickly cloaked himself in the mantle of Leninist “scientific socialism”, and the country began a relentless slide into poverty and isolation.

Before the 1970s were over, Madagascar had turned into a bankrupt autocracy. Except for three unhappy years between 1993 and 1996, Ratsiraka ruled until 2002. From his first to his last year in office, the country’s GDP fell from $410 to $240 per capita. Much foreign investment, including oil companies, fled or stayed away.

Ratsiraka’s devastating reign finally ended in a seven-month standoff with his successor, Marc Ravalomanana, a self-made dairy millionaire. Ravalomanana inherited a country divided, and economically devastated, but has gradually opened Madagascar to foreign investment. Small, adventurous oil companies, such as Vanco and Sterling, began to buy the licences to drill for oil on and off the country’s shores. In the impoverished south of the island, Rio Tinto is building a $585m mine from which it will dredge ilmenite, the pigment used to dye a huge range of products from paints to toothpaste.

Ravalomanana knows well the benefits that deep foreign pockets can bring. He studied in Denmark after persuading that country’s ambassador to underwrite the cost, and, at 33, received a loan from the World Bank with which he turned his small home-made yogurt business into Tiko, the country’s biggest dairy company and a force in agribusiness.

Madagascar’s capital, Antananarivo (know to everyone as Tana) is a town full of eccentrics. It is only fitting that the resident World Bank representative is called James Bond. We meet at the bar of La Varangue, Tana’s classiest French restaurant. Set back in a courtyard, just around the corner from the president’s palace, La Varangue is part of a boutique hotel. A collection of old cameras and other knick-knacks from Madagascar’s colonial past greets visitors in the entrance.

Over two glasses of Bordeaux and a plate of saucisson, the affable Bond dispels my dangerous notion that Madagascar’s rural poor suffer a less miserable type of poverty than that I had encountered in Nigeria and Congo-Brazzaville.

Madagascar has not even had an agricultural revolution, Bond tells me. The peasants live mainly off subsistence farming. Many will walk for days to get to the nearest market, taking their zebu- pulled carts filled with rice. As the developed world moves away from cash to credit cards, most of Madagascar has yet to graduate from bartering. But Bond warns that subsistence farming has reached its limits.

It cannot sustain a population that has tripled since colonialism ended, and this is beginning to show. Instead of using fertiliser, local farmers burn the earth, in an environmentally destructive habit they call tavy. This approach, and their use of wood as a primary source of energy, has cleared three-quarters of the country’s forests in 40 years.

Madagascar’s unique wildlife, its lemurs and aye-ayes, is now non- existent on much of the island. In the past 40 years tavy has turned Madagascar from a paradise of flora and fauna into a rust- coloured rock whose rivers bleed red silt into the Indian Ocean.

Even in May, just after the rainy season when Madagascar enjoys a few verdant weeks, the black spots where the vegetation has been slashed and burned look – from the vantage point of a helicopter – like the markings of a smoker’s diseased lung. It may be too late for some of the island’s threatened wildlife. But there is hope that its people might escape the “oil curse” that has blighted so many poor but oil-rich countries.

Chekhov’s idea of hell may be Sakhalin Island, but mine is Nigeria. More than 50 years of oil “wealth” has turned Africa’s biggest oil exporter into a place in which one cannot check in to a hotel without being bribed; where rebels hold oil executives hostage and villagers are so poor that they are willing to risk blowing themselves up stealing petrol from pipelines that run across their fields.

If Madagascar is to stand even the slimmest chance it must eradicate bribery and sleaze. The current situation is not promising. Sinking back into a flowery upholstered sofa, Bond explains: “Madagascar was taken off the UN’s list of poorest countries in the 1970s when it was an economy based on competition. It has become an economy full of tariffs that have created a culture of corruption where civil servants are paid off, and enterprise that used to create value has been destroyed.”

At the very least, the country must pay its civil servants enough to feed their families without having to resort to kickbacks, and it needs to enforce policies that deter those at the top from setting a bad example.

Encouragingly, Ravalomanana has made ending corruption the centrepiece of his presidency. He likes to say he is too rich to need kickbacks, or even a pay cheque. Diplomats believe he has done a decent job, even though some of his policies have helped his business and raised ambassadorial eyebrows.

Ravalomanana likes to tell them the following story to drive home how different he is from his predecessor: When he finally sat down at the presidential desk, he went through its drawers and, in the bottom one, found a pay-stub belonging to Ratsiraka. It was for $300. Just days earlier the deposed president had been whisked away by jet to an elegant Parisian neighbourhood, where he now lives the kind of life that requires an income with several extra zeros at the end.

Despite the fine aims, there’s depressing evidence of pervasive everyday corruption. The sparkling silver Land Rover Discovery belonging to Madagascar Oil I had been riding in was stopped outside the presidential palace. On each occasion the guards did nothing to mask their disappointment when we presented our passports (as is law in Madagascar) rather than monetary compensation for having forgotten to retrieve them from the hotel safe.

Madagascar – among the world’s poorest countries – is home to some 2,000 French expatriates. Locals complain that many of these people made their fortunes under Ratsiraka by knowing which officials to bribe. These kickbacks will seem like small change if the country strikes oil. Some bureaucrats are already imagining how they will spend their share, but Madagascar itself is not ready.

Omnis, the country’s fledgling mines and energy agency, is already losing the battle to keep control of trade in the island’s gemstones. Every month, Bond reckons, Madagascar loses $15m in gemstones that are taken from the mud-crusted hands of local diggers, to Bangkok where they disappear into a sea of Sri Lankan and Thai stones without ever having contributed to their homeland’s economy.

But if oil companies waited for oil-rich countries to get their institutions right before they tapped their fields, we would still be riding in horse-drawn carriages or perhaps driving hydrogen cars. Ready or not, Madagascar, the new oil frontier, is attracting even more adventurous souls than Exxon.

Some foreigners are more open than others about their activities on the island: Sunpec, the Hong Kong-based petrochemicals group, has created two companies: Madagascar Petroleum International and Madagascar Energy International. But their representatives in Antananarivo act more like secret agents than oil executives.

When asked whether they wanted to join the weekly social gathering of the other oil expatriates in town, they denied any relationship with Sunpec or oil. But the person who invited them to the meeting told me he could not have made a mistake because the two men had been pointed out to him by the Malagasy official who had sold them an onshore oilfield.

Mike McGown was born in Beaumont, Texas, the home of Spindletop, America’s first “gusher”. On January 10 1901 it soaked its stunned engineers with a 200ft-high geyser of oil, and baptised Texas as America’s oil state. Now the 33-year-old Princeton graduate is chief financial officer of Madagascar Oil, the small, London-based oil company that has bought the rights to develop some of Madagascar’s onshore oilfields. I have joined him and fellow executives in a field trip to visit the sites. Others in the group include Tim Nelson, former rugby professional and son of Robert Nelson, the Australian investor who put up much of the company’s seed money. Robert is also the man who brought in Alan Bond, Australia’s infamous businessman sailor. Bond (no relation to His Majesty’s spy or the World Bank’s man in Antananarivo) owns about 30 per cent of Madagascar Oil, but is now restricted from interfering in its business.

As we set out to visit the oilfields, our expedition is led by Barry Rogers, Madagascar Oil’s indefatigable chief geologist. His rugged looks give away that he has spent most of his life outdoors hunting for oil, first for BP and then for a succession of smaller companies. He is in his element, delighting in ribbing us about the dangers of our ancient, ex-military helicopter and, later, after we have safely landed, the imaginary poisonous insects and snakes at our feet.

Having flown for three hours and then walked another 10 minutes through 8ft grasses, our small party arrives at the Bemolanga oil seep – where oil comes out of the ground without any help at all. We are miles from any road, port, airstrip or pipeline, and the oil beneath our feet is so dense that it will have to be mined, rather than pumped out of the ground. It is an expensive and messy operation that only makes sense if oil prices do not fall. Nevertheless, optimistic US hedge funds and other hungry investors have thrown at least $60m at this project. It’s clear that no one would be standing here if oil prices weren’t at record highs and money wasn’t cheap thanks to low interest rates.

Rogers leans precariously over a waterfall to watch the droplets of oil tumble down beside the water. As he rights himself, he says: “We have to see whether we are a million years too late.”

Madagascar’s oil was created 180 million years ago, during the Jurassic age, when rifts caused the supercontinent of Pangaea to break up and form what is now Madagascar. In the ensuing millennia, as the oil aged, it was squeezed towards the earth’s surface and in the process came under enough pressure for it to change from a liquid to a solid.

Over the next few months, Rogers and his small team of Malagasy geologists should be able to ascertain whether the oil under their plots was “over cooked” or whether it is still a useful source of fuel.

Back at Madagascar Oil’s small field camp of tents and a wooden dining hut, we are surrounded by children. Rogers was the first white man they had ever met, and he is the only one in the group able to put them at ease, through a mime about a tree that refused to hold his weight as he leaned on it.

Rogers and his team based at this remote camp will irrevocably change these children’s lives. Traditional customs here include the practice of unearthing dead relatives once every few years, re- clothing them, and taking them out on the town.

How will these families be affected by the roads that Madagascar Oil must build? Will they herald the start of commerce, or spread the rate of Aids, which, according to UNAIDS estimates in 2004, at 1-2 per cent is extraordinary low compared with southern Africa (nine countries have double-digit rates). How many men will abandon their families in remote villages and walk hundreds of miles to the company’s base camp in the hope of a job?

The future prosperity of 18 million Malagasies undoubtedly lies in the hands of a few oil executives and a handful of adventurous entrepreneurs. But as I return to London and spend another week reporting on rebels causing oil export interruptions in Nigeria, the war in the Middle East and production disappointments from the world’s super majors, it becomes clear that the crew of boats such as the Bin Hai and characters like Rogers will increasingly dictate the future of the rest of the world as well.

Carola Hoyos is the FT’s chief energy correspondent.

Copyright The Financial Times Limited 2006