Full Year Results and Operational Update

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE

UNITED STATES, AUSTRALIA, CANADA OR JAPAN

30 June 2014

MADAGASCAR OIL LIMITED

("Madagascar Oil" or the "Company")

Full Year Results and Operational Update

Madagascar Oil today announces its full year results for the year ended 31 December 2013 and provides an operational update.

Highlights

Operational:

· Commissioning of the 2013 Steam Flood Pilot ("SFP") Plant was completed and commencement of operations was achieved in April 2013.

· At the end of May 2014, cumulative oil production from the SFP was 94,494 barrels of which 46,079 barrels were stored in the Tsimiroro SFP storage tanks.

· All four SFP steam generators are now commissioned and running on 100% Tsimiroro Crude.

· Cyclic Steam Stimulation ("CSS") has been implemented on 24 of the 25 pilot wells.

· Full continuous data gathering on active and temperature observation wells is providing important information about the performance of pilot wells.

· A Block 3104 Appraisal Report and a Declaration of Commerciality under the terms of the Production Sharing Contract were submitted to OMNIS (L'Office des Mines Nationales et des Industries Strategiques) on 8 May 2014.

· Preparation of a Tsimiroro Full Field Development Plan is underway for a planned submission in the second half of 2014.

· Ministerial approval has been given to the Company's subsidiary Madagascar Oil SA to sell a volume of Tsimiroro produced oil of between 55,000 and 73,000 barrels, as a test of acceptability in the domestic market, over a six month period beginning in the second half of 2014.

· Madagascar Oil SA was delighted to welcome the President of Madagascar, H.E. Hery Rajaonarimampianina, to the Tsimiroro SFP site on 18 June 2014 to inaugurate our newly constructed crude oil blending facilities which will enable us to undertake these early test sales.

· Strong collaborative working relationships have been established with relevant government departments, particularly OMNIS.

· A full structural geological re-interpretation of Block 3104 and the Tsimiroro Field has been completed.

· There were no lost time incidents in 2013.

· Madagascar Oil SA is in compliance with all National Environment Office reporting requirements in line with the existing SFP Environmental Permit. Environmental Impact Studies for an initial field development are underway.

· Open consultation continues with local village representatives and authorities over infrastructure projects, employment and land use.

Financial Results:

· A major capital raise was completed in February 2013 by way of a US$78.4 million (gross), fully subscribed, Placing and Open Offer in which the vast majority of the Company's substantial shareholders participated. This was used to settle a US$15.0 million short-term bridge loan.

· Net loss for the year ended 31 December 2013 of US$11.9 million (2012: US$13.5 million).

· Exploration and evaluation cash expenditure amounted to US$24.5 million (2012: US$50.8 million), primarily relating to the Tsimiroro SFP.

· Net cash used in operating activities (prior to working capital movements) of US$9.3 million (2012: US$8.7m).

· The Group ended the year with US$24.5 million (2012: US$15.9 million) of cash and cash equivalents inclusive of US$1.1 million (2012: US$1.1 million) restricted cash balances.

· Staff costs reduced by US$1.1 million to US$4.4 million (2012: US$5.5 million) due to improved efficiencies, restructuring of the Board and management team and closure of the Houston office in August 2013.

· Settlement was reached with the Madagascar Tax authorities in November 2013 over a long-running dispute over Value Added Tax ("VAT") on foreign services for the financial years 2007-2011, resulting in a payment of approximately US$4.5 million (2012: Nil) for those years.

Commenting on today's announcement, Iain Patrick, Senior Independent Director, said:

"The Company has made encouraging progress in 2013, and 2014 will be another important year. The thermal response from the Amboloando reservoir in the steam flood pilot area has yielded sufficient information to allow oil production projections to be made which enabled Madagascar Oil SA to declare the commerciality of Tsimiroro, under the terms of the Production Sharing Contract, in early May 2014. After ten years of operating under an exploration licence on Block 3104, we are progressing into a new phase for the Tsimiroro field. Madagascar Oil SA intends to submit a Full Field Development Plan during the second half of 2014. We will be working closely with our partner OMNIS and the Government of Madagascar to finalise this Plan and obtain an Exploitation Licence which would entitle Madagascar Oil SA to a period of at least 25 years to develop and produce oil from Tsimiroro.

"Our employees have performed remarkably in meeting the challenges so far and it is with great anticipation that we enter into the next chapter in the developing story of the Tsimiroro Field."

Competent Person's Statement:

The information contained in this announcement has been reviewed and approved by Stewart Ahmed, Chief Operating Officer of the Company, who has over 29 years of relevant experience in the oil industry. Mr. Ahmed is a member of the Society of Petroleum Engineers (SPE).

A copy of the Company's annual report and accounts for 2013 will be posted to shareholders on 30 June 2014 and a copy is available for download via the Company's website at www.madagascaroil.com.

Link to Financial Statements:

http://www.madagascaroil.com/documents/Madagascar_AR_2013.pdf

Dear Shareholders,

It is with great pleasure that I provide this Senior Independent Director's Statement in respect of the Financial Statements for the year-ended 31 December 2013. I am making this Statement in the absence of a Chairman since Andrew Morris left the Board in November 2013. I would like to put on record my thanks to Andrew for his efforts and dedication to the Company over the years that he served as a non-executive director and Chairman.

The Company made significant progress in 2013, commencing with the successful raising of additional funds to finance the Steam Flood Pilot ("SFP") project at our Tsimiroro Field (the "Field") in Madagascar. This fundraising resulted in the issue of 275,237,772 common shares in the Company ("the Placing and Open Offer"). The Placing and Open Offer was fully subscribed and closed on 12 February 2013, raising approximately US$78.4 million (gross). The vast majority of our substantial shareholders participated in the fundraising and we are grateful for the continued support of our shareholders which has enabled the Company to accelerate its operational progress towards unlocking the significant potential of the Tsimiroro heavy oil field.

Construction of the SFP facility was completed in early spring 2013, allowing operations to commence and leading to the first continuous generation and injection of steam on 8 April 2013. After a slow start to achieve full commissioning, the performance of the SFP has been very encouraging. Oil production has built steadily, initially from Cyclic Steam Stimulation ("CSS" or "Huff and Puff") cycling of the wells with the subsequent encouraging onset of steam injection support being observed in some areas of the pilot. The key steam oil ratios being achieved are also positive, with combined CSS and steam flood responses being consistently in the 3-5 barrel per barrel range since December 2013. The loss of three wells due to mechanical integrity has been disappointing, however this is not related to the thermal injection process and plans to reinstate these locations are well advanced. The thermal response from the Amboloando reservoir in the pilot area has yielded sufficient information to allow oil production projections to be made and enabled Madagascar Oil SA to declare the commerciality of Tsimiroro under the terms of the Production Sharing Contract ("PSC") on 8 May 2014 (the "Declaration of Commerciality"). At the end of May 2014 cumulative oil production from the SFP was 94,494 barrels of which 46,079 barrels were stored in the Tsimiroro SFP storage tanks.

After the first year of SFP operations, early projections of the estimated ultimate recoveries from the combined CSS and steam flood responses are being worked on by the management of the Company. A wide range of outcomes remains possible but the potential commerciality of a development even at the lower end of expected outcomes allowed the Company, through its subsidiary Madagascar Oil SA, to proceed with the Declaration of Commerciality. The continued operation of the SFP will contribute to a better assessment of the ultimate oil recovery and rate projections and the exploitation of the area beyond the immediate SFP is being planned as the first step in the full field development at Tsimiroro. Further appraisal of the field and the greater licence area is also being planned including drilling, seismic and other geological studies. 

Following the Declaration of Commerciality, Madagascar Oil SA intends to submit a full field development plan ("FFDP") in the second half of 2014. We will be working closely with our partner L'Office des Mines Nationales et des Industries Strategiques ("OMNIS") and the Government of Madagascar to finalise the FFDP and obtain an Exploitation Licence which will entitle Madagascar Oil SA to develop and produce oil from Tsimiroro for a period of at least 25 years.

Our Tsimiroro Development Planning Team was established in late summer 2013. This team has derived detailed technical and commercial parameters for the reservoir development, drilling design, facilities requirements and worked on other stakeholder issues for the ongoing appraisal and phased development of the Tsimiroro field. These parameters have been developed by experts with proven worldwide proficiency in thermal field applications and will form the basis of the Tsimiroro FFDP. The initial development phase will be based on extending the SFP area and facilities, targeting the area of the reservoir of which we have the greatest understanding, while simultaneously performing appraisal of the remainder of the extensive Tsimiroro Field. Progress of the FFDP will be on a step-by-step basis as further information is obtained.

The Company received confirmation on 21 May 2014 that the decree permitting test sales of Tsimiroro crude oil in the local market had been approved at a meeting of the Madagascar Council of Ministers. I am pleased that Madagascar Oil SA has now accumulated sufficient production to be able to carry out early test sales of our crude oil in the local market. It is intended that test sales of between 55,000 and 73,000 barrels of Tsimiroro crude oil will commence in the second half of 2014 for up to six months under the terms of the PSC. The Company was delighted to welcome the new President of Madagascar, H.E. Hery Rajaonarimampianina, to the Tsimiroro SFP site on 18 June 2014 to inaugurate our newly constructed crude oil blending facilities thus enabling us to undertake the early test sales. These early test sales will represent the first time that oil which has been produced in-country will be sold and our Company is proud to be in the vanguard of this new chapter for Madagascar.

The Company is grateful to the Government of Madagascar including the Ministry of Strategic Resources and OMNIS for the support they have shown us and we look forward to working with them constructively in the coming months as we seek approval to proceed with the appraisal and development of Tsimiroro, alongside SFP operations which we plan to continue to operate for the foreseeable future to improve our understanding of the Field's production potential. 

The safety record during the construction and operational phases was exemplary with zero lost time incidents ("LTIs") being recorded in 2013 and this has continued into 2014 to date with over 2.6 million man-hours without an LTI to 31 May 2014. The SFP operations and maintenance crew have performed remarkably given the unique nature of the plant and its remote location. Initial problems with the steam generators have been overcome and all four generators are currently available for SFP operations, providing more than sufficient steam for our requirements. One important example of our team's innovation has been the reduction in the usage of diesel which was initially blended with our crude to run the steam generators. Since January 2014 our generators have been running on 100% Tsimiroro crude, saving significant diesel costs and also demonstrating the positive fuel characteristics of the Tsimiroro crude. Accepting our responsibilities to the Madagascar population and environment continues to be at the heart of our engagement with stakeholders at national, regional and village level. Recruitment and on the job training of the Madagascar workforce both at the SFP location and the Antananarivo office has been an early success of the project. Protection of the environment has also been a feature with particular attention paid to water resource management, erosion control and preventing oil spills. We are working closely with all Madagascar authorities, the National Environment Office and outside agencies to ensure their understanding of the project, that their experience and wisdom is effectively applied to the planning and execution of the project and that we meet and exceed standards jointly agreed.

Our focussed Corporate Social Responsibility Programme has been based upon the principles of sustained development and consultation with the local population in the Tsimiroro Field area while gaining approval from national authorities. The healthcare clinic, water supply, school building and road improvement infrastructure projects are prioritised by the villages adjacent to the SFP and are bringing real benefits to communities. Individual initiatives are being co-ordinated with national authority or National Government Organisation supported institutions such as child vaccination, eye clinics and health awareness campaigns which the presence of the pilot plant and logistics support facilitates.

In December 2012 Paul Ellis stepped up from being a non-executive director to take on the role of Chief Executive Officer ("CEO") as an interim appointment, from which he resigned in July 2013. The Company has been without a CEO since that time and the management of the Company has been led very effectively by our Chief Operating Officer, Stewart Ahmed, and Chief Financial Officer, Gordon Stein, reporting directly to the Board of Directors. Gordon was subsequently appointed to the Board as an Executive Director in March 2014. We are conducting an active process of recruitment for a new CEO and hope that we will be in a position to make an appointment soon.

The Company successfully concluded the settlement of the long-running dispute over Valued Added Tax ("VAT") liabilities with the Madagascar Tax Administration in November 2013 covering all charges, penalties and interest for VAT payable on foreign services for the period 2007 to end 2011. The settlement reached in 2013 will allow the Company to move forward into the future with a greater degree of confidence. The Madagascan Tax Authorities have yet to carry-out an audit of VAT for the Financial Years 2012 and 2013 and the Company has made an appropriate provision in its Financial Statements for the year ending 31 December 2013 for a possible future VAT settlement for those years.

The Company is working on a financial strategy to secure the funds required to support the next phase of the Group's planned activities which will include the commencement of the Tsimiroro development, further appraisal drilling and seismic activity on the Tsimiroro field, ongoing exploration licence activities and for corporate working capital requirements. The scale of funds will be determined by the pace of the Tsimiroro development, the number of wells required and forecast revenues from production. In addition to the need to fund the Tsimiroro development in the medium term, the Company requires funding to cover corporate overheads for the foreseeable future. This is discussed in more detail in the Financial Review on page 11. The Company is actively looking at a number of fund-raising options and further information will be provided to shareholders in due course on how the Company will finance the Madagascar Oil Group's ongoing and future business plans. 

Progress on the exploration licenses consisted of the completion of a new geological interpretation over Blocks 3105/6/7 incorporating all existing data including the 2012 acquired Airborne Gravity Gradiometry ("AGG") data. The two geological outcrop sampling trips in 2013 yielded positive source rock and reservoir quality samples allowing improved risking of the prospect and lead inventory. Seismic infill acquisition programmes have been designed based on maturing the leads to drillable prospects. Since late 2013, we have been actively seeking to farm-out the exploration licences and this process continues with the latest interpretations being made available to the farm-out data room entrants.

In conclusion, the Group has made encouraging progress in 2013 and 2014 will be another important year. After ten years of operating under an exploration licence on Block 3104 we are progressing into a new phase for the Tsimiroro field. Our employees have performed remarkably in meeting the challenges so far and it is with great anticipation that we enter into the next chapter in the developing story of the Tsimiroro Field.

I would like to thank management, our staff and contractors for their dedication and efforts during a year which has seen a significant positive transformation in the Company's understanding of its major asset. We look forward to the outcome of our endeavours playing a role in the development of Madagascar for the benefit of the country and its people as well as our Company and its shareholders.

Iain Patrick

Senior Independent Director

Highlights

· A Block 3104 Appraisal Report and the Declaration of Commerciality under the terms of the Production Sharing Contract ("PSC") were submitted to L'Office des Mines Nationales et des Industries Strategiques ("OMNIS") on 8 May 2014.

· Interpretation of well performance to date has been encouraging enough to support the Declaration of Commerciality for the first phase of development and ongoing field appraisal

· Preparation of the Tsimiroro Full Field Development Plan ("FFDP") is underway at the time of publishing this report for a planned submission in the second half of 2014.

· Commissioning of the 2013 Steam Flood Pilot ("SFP") plant was completed and commencement of operations achieved in April 2013.

· At the end of May 2014 cumulative oil production from the SFP was 94,494 barrels of which 46,079 barrels were stored in the Tsimiroro SFP storage tanks.

· Ministerial approval has been given to Madagascar Oil SA to sell a volume of Tsimiroro produced oil of between 55,000 and 73,000 barrels as a test of acceptability in the domestic market over a six month period beginning in the second half of 2014.

· Strong collaborative working relationships have been established with relevant government departments, particularly OMNIS.

· A full structural geological re-interpretation of Block 3104 and the Tsimiroro Field has been completed.

· All four SFP steam generators are now commissioned and running on 100% Tsimiroro Crude.

· Cyclic Steam Stimulation ("CSS") has been implemented on 24 of the 25 pilot wells

· Full continuous data gathering on active and temperature observation wells is providing important information about the performance of pilot wells.

· Two new temperature observation wells drilled and cored in late 2013 to speed up interpretation of reservoir performance.

· There were no lost time incidents in 2013.

· Madagascar Oil SA is in compliance with all National Environment Office ("ONE") reporting requirements in line with the existing SFP Environmental Permit. Environmental Impact Studies for an initial field development are underway.

· Open consultation with local village representatives and authorities continues over infrastructure projects, employment and land use.

· Successful surface geology fieldtrips have been completed on the exploration licences.

Summary

The predominant focus of the Madagascar Oil Group during 2013 has been in Block 3104 to transform the interpretation of geological and well data gathered over many decades for Tsimiroro, and on the operation of the Tsimiroro SFP plant. The construction of the SFP was completed in early spring 2013 and operations commenced leading to the first continuous generation and injection of steam on 8 April 2013. CSS has been applied on all 25 wells comprising the SFP. At year-end 2013, cumulative oil production was 36,357 barrels. At the end of May 2014 cumulative oil production was 94,494 barrels of which 46,079 barrels were stored in the Tsimiroro SFP storage tanks. After a slow start in commissioning the steam generators and raising steam injection rates into the pilot flood wells, four generators are now available and are being fuelled by undiluted Tsimiroro crude oil. Full data acquisition from the producing wells which have undergone up to six Huff and Puff cycles has given sufficient encouragement about well production capacity after steam stimulation to declare commerciality under the PSC.

On the three exploration licenses 3105, 3106 and 3107 a complete re-interpretation of the structure and prospectivity of the licences commenced in 2013. This was supported by two successful field trips that recovered reservoir quality and source rock samples from the sedimentary sequence from surface outcrops. The results of the 2012 acquired Airborne Gravity Gradiometry ("AGG") survey were fully integrated into the new evaluation of the blocks. A farm-out programme exercise covering the three licenses was initiated in November 2013.

Tsimiroro - Block 3104 (Madagascar Oil SA 100%)

The Tsimiroro heavy oil field covers approximately 1,600 km2 of the 6,670 km2 area of Block 3104. The best independent estimate of contingent original oil in place (Netherland, Sewell & Associates, Inc., September 2011) is approximately 1.7 billion barrels, with further significant prospective oil in place in adjacent untested structures. The oil is heavy (15° API gravity from a recently completed refinery assay) and has a high viscosity at the original temperatures encountered in the shallow sandstone reservoir. In order to reach commercial oil production rates, thermal methods of recovery such as steam injection must be applied to reduce the viscosity of the oil in-situ.

Description of the Tsimiroro Steam Flood Pilot Design and Objectives

The Tsimiroro SFP project was designed to evaluate the potential production rates and recovery factor that can be achieved through thermal stimulation of the Amboloando heavy oil reservoir. Two stimulation methods were to be evaluated. CSS, also known as Huff and Puff, is applied to every well whereby steam is introduced to the well and allowed to transfer heat to the oil. The well is then turned round to production to allow the oil to flow. Oil and the condensed steam are produced back due to the viscosity reduction effect of the heat. Oil production rates decline over time as the temperature reduces and when the flow-rate reaches a pre-determined low the production is stopped and the steam injection cycle is recommenced. This cyclic method has been applied in heavy oil fields around the world, where successful, typically with Recovery Factors of 10-25%. The second method to be evaluated was steam flooding where, in favourable cases, recovery factors of 60% or more have been achieved in successful applications such as the Duri Field, Indonesia and Kern River California, USA. In this methodology, steam is introduced continuously into designated injection wells to heat and drive oil to adjacent continuous production wells.

The Tsimiroro SFP was designed with 25 active wells drilled during 2012 to a regular pattern. Sixteen wells destined for continuous production were drilled in a 4 by 4 square. A steam injection well was drilled at the centre of each set of four production wells making up what is called an "inverted five spot pattern". Temperature observation wells were initially placed within the steam flood pattern area to periodically measure the temperature and two additional observation wells were drilled and cored in late 2013 to improve data coverage. Several water wells and water disposal wells were drilled in 2012 both to source the water for steam generation and to dispose of the waste water. Madagascar Oil SA installed the infield pipework and manifolds, rod pumping units ('nodding donkeys'), heat exchangers, four steam generators and associated water treatment, oil/water separation facilities and three 60,000 barrel oil storage tanks. Continuous steam generation and injection commenced on 8 April 2013.

Steam Flood Pilot Operation

Six of the nine inverted five spot patterns of the pilot area were targeted for phased commissioning and steam injection commenced in April 2013 into the first such pattern, centred on designated injection well ISF-1. Steam generator commissioning proved problematic with the first two units requiring significant trouble-shooting given five years of deterioration in the Madagascar climate. Steam generation was initiated with a blend of 85% Tsimiroro crude oil and 15% imported diesel. The lack of available steam led to a gradual well by well, pattern by pattern introduction of steam for cyclic operations. Improved understandings on how to operate the steam generators efficiently culminated in a significant breakthrough in that all four generators have been commissioned with the ability to operate using 100% Tsimiroro crude and requiring relatively few maintenance clean-out interventions. The clean burn of the Tsimiroro crude has been one of many initial observations and will be of significant benefit for future development operations, allowing continuous steam generation without reverting to imported diesel as fuel.

The safety record of the construction phase has continued into the operational phase with zero lost time incidents being recorded in 2013. The SFP operations and maintenance crew have performed remarkably given the unique nature of the plant and the lack of previous exposure to any similar operations. Recruitment and on the job training of the Madagascar workforce has been an early success of the project. Protection of the environment has also been a core value of the Group with particular attention paid to preventing oil spills. Water for steam generation is sourced from a shallow aquifer and monitored daily. Produced water is currently disposed of in the deep Isalo sand after treatment during this pilot phase. At the onset of the SFP operation, it was planned to initiate steam flooding in six of the nine patterns available in order to accelerate the response. However, all of the 25 wells were initially placed on CSS cycling. Four wells experienced shallow casing leaks which were diagnosed by steam or water appearing close to the well at surface. Investigations demonstrated that these leaks exist in the top 10-45 metres of the well and are thought to derive from poor quality of casing installed when the wells were drilled in 2012. One well, ISF-8, was repaired. However three wells, ISF-4, ISF-6 and PSF-9, are awaiting repair or re-drill.

The early months of operations were characterised by disappointing steam injection rates of typically less than 100 barrels of water equivalent per day ("BWEPD") per well. These rates were gradually improved by progressively raising of the steam injection pressure while maintaining pressure below the level that would induce fractures of the cap-rock. Target injection rates of over 250 BWEPD have been achieved through this increase in injection pressures. Designated injection wells were targeted for early conversion to continuous steam injection and this was achieved in wells ISF-1, 2, 5, 6, 8 and 9. Subsequently the wells in the three patterns originally excluded were also commissioned as more steam became available. The CSS operation was standardised on a 3,000 barrels of water equivalent "BWE" steam slug enabling consistent cycle on cycle performance comparison. This allowed a single slug to be achieved in a 10-15 day period, followed by a shut-in soak for heat transfer to take place before sustained pumped well production. Production periods have typically been of 25 to 50 day durations depending upon oil rates dropping to the point where the next steam injection cycle is deemed beneficial. The initial wells have completed up to six cycles with improvements in oil volumes per cycle still being observed. This has been one of the many encouraging observations from the first year of SFP performance. Other positive observations are the absence of any steam breaches to surface from the reservoir, the containment of heat in the Amboloando as observed at temperature observation wells, peak individual well oil rates of over 160 barrels of oil per day ("BOPD") and thermal communication between injection and production wells. 

The loss of key injection wells ISF-4 and 6 means that the full nine pattern steam flood could not be implemented, with continuous injection only being achieved after one year of operations into six of the nine patterns, centred on ISF-1, ISF-2, ISF-3, ISF-7, ISF-8 and ISF-9. Two wells on CSS cycling PSF-1 and PSF-15 have displayed thermal responses to offset steam injection. One well ISF-5 designated as a continuous injection well has been on continuous natural flow since December 2013 as a response to both pressure and temperature support from offset steam injection. This positive response to reservoir communication at the well in the centre of the SFP area is taken as an encouraging indication of the steam flood process working in the pilot.

As at the reporting date, the thermal response from the pilot area has yielded sufficient information to generate oil production projections from the Amboloando reservoir performance albeit with a wide band of uncertainty. The CSS oil rate projections derived from the first year of operations, can be shown to deliver positive economic results. The steam flood recovery mechanism is projected to enhance recovery factors compared with the CSS method and would yield improved economic indicators over the CSS method alone.

The Tsimiroro Development Planning Team, which was established in late Summer 2013, have prepared detailed technical and commercial inputs into the reservoir development plan, including thermal well and facilities requirements to perform a full field exploitation of the Tsimiroro main field. The Tsimiroro FFDP is being prepared for submission which incorporates a phased approach to field areal development. The initial development phase being studied is based on drilling beyond the current SFP area targeting exploitation of the area of the field of which we have the greatest current understanding while simultaneously performing appraisal of the remainder of the giant Tsimiroro Field.

Bemolanga - Block 3102 (Madagascar Oil SA 40%)

The Bemolanga Block covers an area of approximately 5,463 km2 and is operated by Total E&P Madagascar S.A.S, which holds a 60% working interest. The block contains an extensive tar sand deposit that exists at a shallow depth allowing potential surface mining. A detailed evaluation by Total including a two year 160 well coring programme in 2009/2010 was conducted. The results indicated that the oil (bitumen) content of the sand varied from 3.5% to 11% by weight, with an average oil content of 5.5% for the effective mineable area. This oil yield is approximately half of that encountered with typical Canadian oil sands. 

Laboratory studies were conducted into the extraction of the bitumen from the rock and an economic model was built. Despite the size of the deposit in the area studied, estimated at 1.2 billion barrels of mineable bitumen, the study confirmed that, at a base oil price range of US$60-$100/bbl Brent, the cost of mining the ore, crushing the rock, extracting the bitumen, upgrading, blending and shipping the heavy oil product would not support a commercial mining project.

Madagascar Oil SA and Total therefore elected to switch their attention to the potential conventional oil and gas plays on the block and carried out an 8,000 km2 AGG survey in 2011 which identified two promising prospective features. The results of this work indicate that further seismic acquisition is required in order to confirm the presence of drillable prospects. A programme of 400 km of 2D seismic has been planned with Total assuming the majority of the costs in accordance with the terms of the Block 3102 farm-in agreement. The amendment to the production sharing contract relating to the Bemolanga field to extend the exploration period is awaiting government approval to allow this work to proceed. No progress on this approval was made in 2013. It is expected that the new Presidency will review the status of all exploration licenses to allow extensions to meet work commitments that have not been progressed during the latter years of the transitional Presidency. 

The extension approval had not been received in time to commit to seismic acquisition work in 2014. The operator remains committed to proceeding with this work when the license extension is approved.

Exploration Blocks (Madagascar Oil SA 100%)

· West Manambolo - Block 3105

· Morondava - Block 3106

· Manandaza - Block 3107

The exploration blocks cover a total area of 17,400 km2 in the Morondava Basin and lie immediately to the south of the Tsimiroro Block.

Earlier operators discovered both gas and light oil in the exploration blocks, but the number of wells drilled to date using modern data is very low and Madagascar is still a frontier area. However, all the elements of a working petroleum system are present and it is entirely possible that commercial volumes of light oil and gas are waiting to be discovered.

Following a seismic programme carried out by Madagascar Oil SA in 2009, a number of encouraging structural leads were identified on the exploration blocks. This work was followed in 2010 with an 800 km2 Gore geochemical study aimed at identifying the signature of hydrocarbon micro-seepage over the identified leads. The results have been re-evaluated during 2013 but have not yielded any conclusive leads. In 2012 the Madagascar Oil SA carried out a 24,000 line km AGG survey over the exploration blocks and the data from this survey has been processed and integrated with the 2009 and earlier seismic surveys, well data, surface geology and regional studies in 2013 in order to produce a revised structural interpretation over the three licenses. The AGG in particular has yielded new insights into the structure which when integrated with the seismic allows new leads to be identified. Two east-west field trips in 2013 were successful in gathering outcrop samples from the sedimentary sequence with quality samples gathered validating both quality source rock presence and reservoir quality rock in possible target horizons. New 2D seismic infill programmes have been designed for implementation to identify drillable prospects. 

Since late 2013, we have been actively seeking to farm-out the exploration licences and this process continues with the latest interpretations being made available to the farm-out data room entrants. Further work on the exploration blocks will be directed by a successful outcome of the farm-out exercise and the Company will also be investigating the possibility of extensions to the licence exploration periods to allow the prospect and lead inventory to be matured.

Stewart Ahmed

Chief Operating Officer

Summary

The main financial activities of the Group in 2013 related to completion of the construction and commissioning of the SFP facilities and the subsequent commencement of SFP operations in April 2013. Whilst the Group has been producing crude oil from the SFP since soon after that date, no revenues are shown in the financial statements for 2013 as no sales were made during the year. The financial statements for the year to 31 December 2013 therefore include the costs of the SFP, together with the costs of running the corporate group. This includes costs associated with the commercial and technical analysis of the SFP performance and in development planning activities for the Tsimiroro Block. In addition, the Group has incurred costs in undertaking technical studies on our other exploration licences (Blocks 3105, 3106 and 3107).

Following the restructuring of the Board and management team, Madagascar Oil continued reducing its operating cost base in 2013. This included closure of the Houston office in August 2013 and transfer of responsibilities to our Madagascar and UK offices. As a result, staff costs have reduced to US$4.4m (2012: US$5.5m). This reduction reflects a concerted and continuing campaign to reduce general administrative expenses whilst maintaining the Group's operational capacity.

Total general and administrative and VAT penalty expenses increased to US$10.0m (2012: US$9.6m). This is primarily due to VAT penalties recognised as a result of the tax dispute settlement and increased legal and professional fees relating to the Board restructuring and Houston office closure during 2013.

A one off Property, Plant and Equipment ("PP&E") impairment charge of US$750,000 (2012: US$nil) has been recognised in respect of obsolete drilling equipment following a physical equipment review. In 2012 an Exploration & Evaluation ("E&E") impairment charge of US$2.7m was recognised.

The Group continues to invest in exploration and evaluation across all of its licences incurring cash expenditure of US$24.5m (2012: US$50.8m) during the year, primarily relating to the Tsimiroro steam flood pilot.

Cash and bank resources totalled US$24.8m at 31 December 2013 (2012: US$15.9m) inclusive of US$1.1m (2012: US$1.1m) restricted cash balances.

Selected operational and financial data

Results for the year

In the year ended 31 December 2013 the Group reported a reduced loss before tax of US$12.1m (2012: US$13.6m).

Operating costs, relating primarily to contractual PSC fees, remained constant at US$1.2m (2012: US$1.2m) for the year.

Overall, general and administrative and VAT penalty expenses increased to US$10.0m (2012: US$9.6m). The increase is primarily due to VAT penalties recognised as a result of the 2007-2011 VAT settlement paid during the year, and accrued estimated penalties for the outstanding 2012 and 2013 VAT audits. Furthermore, additional legal and professional fees have been incurred relating to the Board restructuring and Houston office closure during 2013.

Following the restructuring of the Board and management team, the Group has focussed on reducing its operating cost base and accordingly, since the closure of the Houston office in August 2013, the underlying recurring general and administrative costs have reduced significantly. Staff costs have reduced by US$1.1m to US$4.4m (2012: US$5.5m) for the year.

A one off PP&E impairment charge of US$750,000 (2012: US$nil) has been recognised in respect of unused drilling equipment following a physical equipment review. In 2012 an E&E asset impairment charge of US$2.7m was recognised, relating to obsolete non-consumable assets previously capitalised.

Balance sheet

The Group's non-current assets increased during the year to US$221.3m (2012: US$196.7m) as a result of continued investment in the Tsimiroro SFP and ongoing capital expenditure on the remaining exploration blocks.

Diesel inventory has been recognised for the first time in 2013 as significant stocks were held at year end. The diesel was used in 2013 as fuel for the steam generators, local power generation at the SFP site and rolling stock, and was valued at a cost of US$1.0m (2012: US$nil) at 31 December 2013. Since January 2014 diesel has no longer been required for use in the steam generators at the SFP site but will be consumed by other ongoing operations. 

Trade and other payables have reduced significantly to US$6.3m (2012: US$22.2m) due to settlement of outstanding suppliers and the 2007-2011 VAT settlement in November 2013.

Cash flow

Operating cash outflow for the year substantially increased to US$22.2m (2012: US$8.6m) predominantly due to settlement of trade and other payables and other working capital movements, including the VAT settlement.

Net cash used in investing activities during the year amounted to US$26.8m (2012: US$58.6m) mainly reflecting US$24.5m (2012: US$50.8m) of exploration costs.

In February 2013 US$78.4m (gross) was raised through an equity offering, of which US$15.0m was used to settle the outstanding short term bridge loan.

The total increase in cash and cash equivalents during the year was US$9.0m (2012: decrease of US$25.7m).

Financial position

At 31 December 2013 the Group had total cash and cash equivalents of US$24.8m (2012: US$15.9m) of which approximately US$12.1m was held in a US money market fund and US$12.3m in accounts with banks in the EU. The credit risk on such cash is limited because it is on deposit with banks with good credit ratings assigned by international credit rating agencies. Management considers the above measures to be sufficient to control the credit risk exposure.

Restricted cash balances at 31 December 2013 totalled US$1.1m (2012: US$1.1m) representing funds securitised as collateral in respect of future work obligations on the exploration blocks and as security for corporate credit card payments.

Going concern

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Senior Independent Director's Statement and Chief Operating Officer's Review of Operations. The financial position of the Company at the year end and its cash flows and liquidity position are included in this Financial Review. The Company closely monitors and manages its capital position and liquidity risk regularly throughout the year to ensure that it has sufficient funds to meet forecast cash requirements and satisfy the planned capital programme. 

After making enquiries and careful consideration, the directors have concluded that there is a reasonable expectation that the Company has access to adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. However in making this assessment the directors have considered the following matter which gives rise to a material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern. If as a result of this material uncertainty the Company was unable to continue as a going concern, it is unlikely that it would be able to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that may result if the Company was unable to continue as a going concern.

Funding requirements for ongoing operations

The Company held US$24.8m cash at the end of December 2013 with this including US$1.1m of restricted cash. As the Company has now declared commerciality on the Tsimiroro Field, under the terms of the PSC it will need additional funds to enable it to progress a development of the Field in 2015 and beyond. It is planned that the Development Plan will be submitted in the second half of 2014 and it is hoped that approval from OMNIS and the other relevant Madagascar Government bodies will be achieved soon afterwards. The Company will need to raise additional funds to meet its obligations going forward and is currently working on a financial strategy to secure the funds to support the next phase of the Group's planned activities which will include the commencement of the Tsimiroro Development, further appraisal drilling and seismic activity on the Tsimiroro field, ongoing exploration licence activities and for corporate working capital requirements. The estimated quantum of funds will be determined by the pace of the Tsimiroro Development, the number of development wells required and forecast revenues from production. Notwithstanding the need for funds for development of the Tsimiroro field, current cash balances would not be adequate to cover costs in the normal course of business in the event that the project was delayed. The Company is actively looking at a number of fund-raising options and further information will be provided to shareholders in due course on how the Company's ongoing and planned business plans will be financed. The outcome of the selected fund-raising option cannot be predicted, and sufficient funds may not be forthcoming to fund the Company's operations. This represents a material uncertainty that may cast significant doubt over the Company's ability to continue as a going concern.

Gordon Stein

Chief Financial Officer

Link to Financial Statements:

http://www.madagascaroil.com/documents/Madagascar_AR_2013.pdf