Chinese oil majors are looking at forming upstream joint ventures in Madagascar to exploit newly discovered reserves on the island situated off Africa's east coast, says a senior official at Madagascar Oil S.A.
More than one Chinese oil firm has approached Madagascar Oil about the possibility of cooperating in oil exploration and taking a stake in the company, which was founded in 2004 and is eyeing a listing in London in the second quarter next year, said the official who asked not to be named.
"They (the Chinese companies) have very deep pockets. I prefer to work with them on the heavy oil projects because those are very capital intensive," the person said, but declined to name the Chinese companies that are in talks with the African oil company.
ExxonMobil Corp. (XOM), Sterling Energy PLC (SEY.LN) and Aminex PLC (AEX.DB) have already formed joint ventures with local partners since 2001 to develop oilfields on the island and offshore. Madagascar is expected to produce its first barrel of crude in 2007.
As China imports about 40% of its oil needs, high international oil prices have pushed the country's cash-rich oil giants to more keenly search for upstream assets overseas to control their costs, analysts said.
Madagascar Oil, with offices in London and the Madagascar capital of Antananarivo, is involved in three major projects. Two are heavy oil developments at the oilfields of Tsimiroro and Bemolanga, while the third is the exploration and appraisal of light oil and natural gas on the world's fourth largest island.
The firm's assets have a total valuation of between US$400 million and US$500 million, the person said.
Heavy oil has more impurities than light oil and thus costs more to refine.
"The Chinese will likely be involved in the Tsimiroro project, because of the big volume," the person said.
The Tsimiroro Oilfield is estimated to have a reserve of several billion barrels of crude, but it is of low quality, with an American Petroleum Institute specific gravity of 14 to 16 degrees.
API measures the purity of the crude. The lower the number of degrees, the lower the quality. Light crude oil has an API specific gravity of around 40 to 45 degrees, while lighter crude has an API specific gravity of 46 degrees or higher.
The Tsimiroro oilfield is expected to start producing crude in 2007. By late 2008 or early 2009, it will be able to produce 25,000 barrels a day, the person said. Daily output is expected to rise to 100,000 barrels by 2011, and the long-range daily output target is 500,000 barrels.
The Madagascar Oil official said a "beauty contest" of potential investors and partners is scheduled for mid-January, prior to the company's planned initial public offering.
"I prefer to work with the Chinese on a project basis rather than on an equity level, as we do not want to give up a big slice...to them. We still want to have control of the company," the person said.
Madagascar Oil has a number of shareholders, including London-listed hedge fund operator RAB Capital PLC (RAB.LN) and Singapore-based First Global Fund, according to the company's Web site.
Madagascar has proven oil and gas reserve potential and 70 wells have been drilled across the country since the 1960s. But progress in oil exploration has been slow because of environmental concerns.
Recent high international oil prices, however, prompted the Madagascar government to step its oil exploration efforts. The country spends one-third of its revenue importing oil and petroleum products.
Chinese oil majors such as China Petroleum & Chemical Corp. (SNP), PetroChina Co. (PTR) and CNOOC Ltd. (CEO) weren't immediately available to comment.
A source at China Petrochemical Corp., or Sinopec Group, said Tuesday the company plans to team up with domestic rival China National Petroleum Corp. to acquire drilling rights to an oilfield in Sudan for about US$600 million.
The two companies also teamed up mid-September to buy Calgary-based Encana Corp.'s oil and pipeline interests in Ecuador for US$1.42 billion.
CNPC unit CNPC International also reached an agreement in August to buy PetroKazakhstan Inc. (PKZ) for US$4.2 billion.