Madagascar, Mired in Poverty, Lures Exxon Oil Search

/ Bloomberg

Two-wheeled ox carts and decades-old Renaults choke the cobbled streets of Antananarivo, Madagascar's capital, reminders of how slowly the country has advanced since independence in 1960. Now the government is auctioning oil drilling rights to improve the lives of its 18 million citizens.

Madagascar, Mired in Poverty, Lures Exxon Oil Search

Madagascar, Mired in Poverty, Lures Exxon Oil Search

Michael Cohen


July 18, 2006

July 18 (Bloomberg) — Two-wheeled ox carts and decades-old Renaults choke the cobbled streets of Antananarivo, Madagascar’s capital, reminders of how slowly the country has advanced since independence in 1960. Now the government is auctioning oil drilling rights to improve the lives of its 18 million citizens.

The tripling of oil prices since 2002 and new technology that can reach oil deposits more than 3,000 feet (914 meters) under the sea have revived the Indian Ocean island’s hopes for an energy boom after previous finds proved unprofitable.

Chameleon in Madagascar

“The potential for oil is very, very big,” says Hugues Rajaonson, head of the energy and mines ministry. “The sector could contribute 15 percent of GDP within five years.”

Exxon Mobil Corp. and Britain’s Sterling Energy Plc plan to drill in Madagascar, where the government says offshore basins may hold as much as 5 billion barrels of oil, enough to meet U.S. needs for a year. President Marc Ravalomanana promises to use oil money to reverse the fortunes of citizens who earn less than $1 a day on average and have a life expectancy of 57 years.

The opposition National Party has criticized Ravalomanana, one of the country’s wealthiest men, for being too close to international investors and awarding government projects to his own company through no-bid contracts.

Irving, Texas-based Exxon, the world’s biggest oil producer, says areas off the coast of Madagascar may hold as much petroleum as West Africa, the company’s largest source of crude.

Surging Prices

“We like what we see in Madagascar,” Chief Executive Officer Rex Tillerson said March 7 at a press conference in New York. The country’s geology is similar to Nigeria and Angola, sub-Saharan Africa’s two largest oil producers, he said.

Instability in the Middle East and surging demand from emerging economies such as China have prompted oil companies to extend their search for reserves to places once dismissed as too expensive. Record-high crude prices have made it profitable to exploit previously unviable fields. Oil rose above $78 a barrel last week on concern violence in the Middle East may cut supply.

Madagascar has awarded prospecting licenses to nine companies, including Exxon and Sterling, and plans to auction 143 more offshore permits by November. Royal Dutch Shell Plc, BP Plc and Total SA have approached Madagascar about bidding.

Growth Plan

The government is preparing for a possible influx of revenue, seeking to avoid the fate of Nigeria and Angola, where billions of dollars of oil income have done little to improve living standards. Madagascar intends to levy a 30 percent tax on oil profits and use the revenue to invest in roads, electricity and education.

“The idea is that all revenues are transparently disclosed and they be spent in an optimal way,” says Andry Ralijona, the government’s asset management coordinator.

Ravalomanana, 56, plans to double Madagascar’s economic growth rate to 10 percent by 2010 and cut the number of people living in poverty in half. The country attracted $100 million in foreign investment last year, compared with the $1.4 billion oil producer Angola received in 2004, according to World Bank data.

The oil push comes as Madagascar emerges from a period of political turmoil. Ravalomanana, formerly mayor of Antananarivo, ran against President Didier Ratsiraka in December 2001. Both sides claimed victory, triggering a seven-month standoff.

Ravalomanana gained control of the country when Ratsiraka and several supporters fled to France. The president says he will run in new elections scheduled for December.

Beaches and Lemurs

The government isn’t pinning all its hopes for economic revival on finding oil and intends to expand manufacturing, mining and agriculture, says Prega Ramsamy, Ravalomanana’s economic adviser. It also plans to triple tourist numbers to more than 600,000 by 2012 by promoting the island’s sandy beaches, rain forests and native lemurs, chameleons and birds.

“This is the first government they’ve had for a long time that has really seen growth as a priority,” says James Bond, the World Bank’s country director for Madagascar.

Just how desperately Madagascar needs change is evident in Antananarivo, a city of about 1.8 million people. Sprawled over a dozen hills, waste water runs through many streets because of an outdated drainage system.

Atop the city’s tallest hill stands the shell of the Queen’s Palace, built in 1867 and one of the city’s main attractions until a fire destroyed it in 1995. A lone crane sits next to the ruins, the only visible evidence of rebuilding.

Rural Poverty

Signs of prosperity are even rarer in rural areas, where peasants farm rice and corn or pan river beds for gold and sapphires. Slash-and-burn agriculture has stripped the island of more than 85 percent of its natural forests.

“The salaries are not enough to live on,” says Dennis Rakotoson, 29, a newspaper vendor who supports his wife and three children on about $2 a day. “The prices of necessities are increasing.”

Average incomes dropped by 50 percent during the past three decades as Ratsiraka nationalized private companies and set up unprofitable state enterprises. Ratisiraka was the island’s military ruler from 1975 to 1993 and regained power in 1996 elections. Last August he was convicted in absentia for embezzling $7.9 million of public funds.

Ravalomanana is a businessman who started Tiko, originally a dairy company, by selling yoghurt from the back of bicycle. He has appointed four Harvard-educated advisers to help draft a strategy for boosting economic growth. Among the measures being considered are tax incentives to encourage investment and modernize the country’s banking system.

Patchy Roads

Ravalomanana is using the skills he developed in building his business to shake up the nation’s $5.1 billion economy, says Vichit Ith, 50, a member of the advisory panel and a former banker for Goldman Sachs Group Inc. in Singapore.

“Madagascar has been sleeping for the past 30 years,” Ith says. “This country can become the platform for economic growth for the whole Indian Ocean.”

Madagascar, which lies off the southeast coast of Africa and has a land mass slightly larger than France, has just 5,780 kilometers (3,592 miles) of paved roads, and cities experience regular blackouts because demand for power exceeds supply.

Some progress has been made. The economy grew an average of 5.2 percent over the past two years and creditors last year canceled the nation’s foreign debt of $836 million. Infant mortality rates have declined and school enrollment has risen, according to the World Bank.

Political Opposition

Some of Ravalomanana’s opponents say conditions aren’t improving for average citizens.

“The president follows directions from the World Bank,” says Roger Ralison, economics professor at the University of Antananarivo and president of the opposition National Party. “That only benefits the rich.”

The inflation rate surged to 18.8 percent last year, from 13.8 percent in 2004, spurred by increases in the price of gasoline, electricity and rice, the country’s staple food.

While the U.S. has criticized Ravalomanana’s government for its control of the press and substandard prison conditions, it has applauded efforts to modernize the economy.

“Ravalomanana is aggressively seeking foreign investment,” the State Department said in an April background note. He is “tackling many of the obstacles to such investment, including combating corruption, reforming land-ownership laws, encouraging study of American and European business techniques, and active pursuit of foreign investors.”

Business and Politics

In 1982, Ravalomanana used a World Bank loan to develop Tiko, which has since become one of the country’s largest companies, encompassing media interests, food processing plants and a construction unit. Ravalomanana’s daughter Sara helps run Tiko, and several former company directors hold government posts.

Asa Lalana Malagasy, a Tiko unit, is the main builder of public roads. In 2003, Tiko took over the state-owned agricultural and trading companies without public bidding, says Richard Marcus, a politics lecturer at the University of Huntsville in Alabama who has studied the country since 1992.

Marcus says Ravalomanana is generally a force for good.

“His businesses benefit from him being president but it’s different from being a kleptocrat,” Marcus says. “In comparison to any other leader Madagascar has had, he is a visionary.”

Ravalomanana, whose office didn’t respond to a request for an interview, has told overseas donors he wants to distance himself from his business interests, says the World Bank’s Bond.

“He is very concerned about how to avoid falling into a trap, how to avoid the conflict of interest,” Bond says. “It’s a tough line to walk.”

Oil companies such as Exxon say they are attracted by the more welcoming environment created by Ravalomanana.

“Madagascar exploration is attractive to Exxon Mobil because the country offers a competitive business climate and sufficient hydrocarbon potential to justify the risk,” says Exxon spokesman Len D’Eramo. “It is a high-risk play. It is much too early to speculate on whether or not we will succeed in finding commercial quantities of oil.”

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