Half Year Results

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

23 September 2014

MADAGASCAR OIL LIMITED

("Madagascar Oil", "MOIL" or the "Company")

Half Year Results

Madagascar Oil today announces its half year results for the six month period ended 30 June 2014.

Highlights

Operational:

· Madagascar Oil S.A. ("Madagascar Oil SA") submitted a declaration of commerciality in respect of Block 3104 ("Declaration of Commerciality") to the Madagascar authorities on 8 May 2014, along with an appraisal report in respect of Block 3104 ("Block 3104 Appraisal report") pursuant to the terms of the Production Sharing Contract between Madagascar Oil SA and OMNIS ('L'Office des Mines Nationales et des Industries Strategiques) in relation to Block 3104 ("PSC"). The PSC terms allow a 180 day period to submit the development plan in respect of Block 3104 ("TDP"). Madagascar Oil S.A is on track for completion of the TDP before the required deadline of 4 November 2014.

· Since April 2013 the steam flood pilot operated on Block 3104 ("SFP" or "Steam Flood Pilot") has been in continuous operation.

· As of 31 August 2014 cumulative oil production had reached over 124,223 barrels from a cumulative steam injection of over 575,936 barrels of water equivalent ("BWE").

· As of 31 August 2014, 62,703 barrels of crude oil were held in the storage tanks at the SFP. A new crude oil blending and truck loading facility has been built at the SFP to allow the crude oil to be blended with diesel to meet the specifications for Heavy Fuel Oil ("HFO") in Madagascar.

· A SFP pattern re-alignment well-work programme was completed in August 2014 which returned all inoperable wells to working condition and reverted to the original nine pattern steam-flood.

· The President of Madagascar, H.E. Hery Rajaonarimampianina,visited the Steam Flood Pilot on 18 June 2014 to inaugurate the blending facility.

· Discussions are ongoing with local electrical power generation companies and other end users over sales tests for the HFO blend produced by Block 3104.

Operations

· Of the original 25 active wells, 15 of the 16 production wells have been successfully subjected to several cyclic steam stimulation ("CSS") cycles and eight of the nine injection wells had enjoyed some period of continuous injection. Three wells however have been non-operational due to near surface casing leaks (ISF-4, ISF-6 and PSF-9).

· Monthly oil production from the SFP, in barrels of oil per day ("BOPD"), averaged for each month in 2014, were as follows:

January; 329, February; 425, March; 361, April; 468, May; 351, June; 332, July; 363, August; 278.

· Monthly steam injection at the SFP, in barrels of water equivalent per day ("BWEPD"), averaged for each month in 2014 were as follows:

January; 2109, February; 1725, March; 1499, April; 1585, May; 1795, June; 1405, July; 579, August; 1247.

· Steam injection was reduced in July 2014 to perform the August SFP pattern re-alignment well-work programme under safe reservoir conditions. August oil production was affected by this steam injection reduction. It is expected that oil production rates will, in the remaining months of 2014, return or be close to the levels achieved prior to the August SFP pattern re-alignment well-work programme.

· In August 2014, an SFP pattern re-alignment well-work programme was carried out which returned all inoperable wells to working condition and reverted to the original nine pattern steam-flood.

· Three wells (PSF-1, PSF-15 and ISF-5) have demonstrated clear thermal responses to offset steam injection by continuous production at temperatures higher than original reservoir conditions. This is indicative of a steam-flood response. Communication with the injection support is also in evidence at several other wells on CSS which is indicative of a response to the pattern steam injection.

· Two additional temperature observation wells have been drilled, both of which have been fully cored. Temperature logging runs are being performed every two weeks in all observation wells, yielding valuable information on the progress of heat through the reservoir.

· All four of the originally installed steam generator units have been commissioned and are running well. Only three are required for peak steam-flood operation at any one time.

· Steam generators are being fuelled by crude oil produced by Block 3104 ("Tsimiroro Crude") without diesel dilution, yielding significant operating cost savings. The Tsimiroro Crude is producing a clean burn and there is a low frequency of planned maintenance clean-outs on the steam generation units.

· Optimisation of the oil/water separation process train is ongoing with the target of reaching a crude oil sales specification of below 1%. The oil currently in storage is below the 1% base sediment and water ("BS&W") specification required by local utilities provider Jirama. Process improvements have been identified for late 2014 implementation at the SFP that will allow a figure of below 0.3% to be met. Initial low steam injection rates of below 100 BWEPD have been increased by increasing the injection pressure to reach the target 250-300 BWEPD. Studies are ongoing into improvements to well productivity and injectivity for the development phase wells.

· A new geological structural interpretation has been completed and submitted to the authorities in the Block 3104 Appraisal Report. Dynamic modelling of the SFP well response using analytical and numerical modelling is achieving good historical matches leading to generation of oil prediction profiles for the development of the heavy oil resource.

· The development planning team ("Development Planning Team") has completed the definition of the technical and non-technical components of the TDP and accompanying cost projections. Drilling studies have completed well designs and costings for the initial development wells.

· Facilities engineering studies have completed a conceptual design for the upgrade of the existing SFP facilities to meet an initial development phase target using truck transport and marine routes to place Tsimiroro Crude in the domestic and local international market.

Outlook

· The TDP is in an advanced state of preparation and is expected to be submitted prior to the required deadline of 4 November 2014. The TDP is being prepared based on the phased exploitation of all commercial hydrocarbon resources covered by the PSC.

· Phase 1 of the TDP ("Phase 1") is a truck transported oil sales phase based on developing the geological compartment containing the existing SFP.

· Phase 2 of the TDP ("Phase 2") will incorporate the installation of a new crude oil transport pipeline to the west coast of Madagascar to facilitate the export of Tsimiroro Crude via tanker once it can be demonstrated that a transport pipeline is commercially viable.

· Madagascar Oil SA has been working with OMNIS personnel since the submission of the Declaration of Commerciality in May 2014, in a series of six work groups ("Work Groups"), each themed on the individual sections of the TDP. The Work Groups have allowed an open dialogue between the Madagascar Oil SA and OMNIS over the technical, commercial and non-technical aspects of the TDP.

· A development evaluation programme ("DEP) is being prepared for early 2015 with the objective of proving up thermally effective oil-in-place that would commercially support investment in the Phase 2 oil pipeline. Thermally effective oil-in-place is that oil located in reservoir rock which has characteristics which allow an assessment that thermal recovery techniques can be expected to be technically applicable. This assessment is typically performed as a comparison with other thermal-recovery projects which in this case will include the existing Steam Flood Pilot results. The DEP is expected to consist of drilling up to 30 new evaluation wells, a ground magnetometer survey to detect igneous dykes in the development area, surface geology for structural element confirmation and reservoir outcrop definition and improved geological modelling of Block 3104.

· Sales tests of Tsimiroro Crude as a HFO blend are expected to commence before the year end of 2014 targeting domestic end-users, including the electrical power generation sites.

· The operational and reservoir management team continues to grow in Madagascar, with the recruitment of more technical staff and managers with extensive steam-flood experience.

· The farm-out process remains in progress for the three exploration licences (3105, 3106 and 3107) held.

Financial

· Cash in hand at 30 June 2014 was $10.1 million (31 December 2013: $23.7million), plus further restricted cash balances of $1.1 million (31 December 2013: $1.1 million). The cash in hand has decreased significantly in the last six months due to cash expenditure on the acquisition of exploration and evaluation assets amounting to $10.0 million and $3.5 million of operational expenses.

· The total loss for the six month period was $5.9 million (six months ended 30 June 2013: $4.9 million) with the movement between the periods mainly as a result of foreign exchange losses caused by the depreciation of the Ariary against the US Dollar. Overall, the costs have remained broadly consistent between the two periods.

· Exploration and evaluation expenditures for the period were $11.9 million (six months ended 30 June 2013: $13.5 million) primarily relating to the operation of the SFP.

· The Company is in advanced negotiations with certain of its major shareholders with regard to an equity fundraising, which is likely to be structured as a placing with a subsequent open offer. Whilst there can be no guarantee that this transaction will complete in the timetable envisaged (or at all) there has been support from the above-mentioned shareholders and a further announcement on the fundraise will be made in the near future.

· The Company is also actively looking at a number of other fundraising options and further information will be provided to shareholders in due course regarding the financing of the Group's ongoing and future business plans.

Post Period End

· Madagascar Oil SA received notification of two decrees dated 4 August 2014 (the "Decrees"), signed by the President of the Republic of Madagascar, the Prime Minister and the Minister at the Presidency in charge of Strategic Resources approving an amendment to the PSC pertaining to the exploration and exploitation of hydrocarbons in the Tsimiroro contractual area (Block 3104) (the "PSC Amendment") and renewing the mining title of exploration of hydrocarbons (the "Exploration Mining Title") granted to OMNIS pertaining to the Tsimiroro contractual area (Block 3104) (the "Mining Title Decree"). The Decrees and the PSC Amendment clarified the duration of the PSC's exploration period and the Exploration Mining Title following the Declaration of Commerciality made by Madagascar Oil S.A. The PSC Amendment extends the exploration period under the PSC from 18 August 2014 until the date that OMNIS obtains a 25-year Exploitation Mining Title pursuant to the PSC.

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

"We have made significant progress during 2014 with the Steam Flood Pilot which continues to show encouraging results and to provide valuable data to assist us in establishing our future plans for Block 3104. We are also making good progress in our preparation of the TDP, following our Declaration of Commerciality in early May 2014, and are on track to submit this before the PSC required deadline of 4 November 2014. We have welcomed the opportunity to work closely with OMNIS in the Working Groups over the past few months to ensure the phased approach we are proposing is understood and acceptable. We are also very pleased to have obtained approval in August 2014 for the amendment to the PSC which we believe clarifies the steps required to pass from the current exploration period into the 25 year exploitation period. Madagascar Oil is very grateful to the Government of Madagascar and OMNIS for their ongoing support."

"The recent well-work campaign has achieved its objectives of reinstating all wells within the SFP to operating condition which is designed to improve the oil rate and recovery achievable from the area. We intend to continue to use our drilling rig in the planned Development Evaluation Programme to improve our understanding of Block 3104 beyond the Steam Flood Pilot area."

"We were delighted to welcome the President of Madagascar to the Steam Flood Pilot in June 2014 to inaugurate our newly constructed oil blending facilities and are in discussions with a local electrical power generation company, Jirama, and other end users over sales tests of Tsimiroro Crude."

"We are working with some of our major shareholders to secure new equity funding in the near future to allow us to move forward with the next phase in the development of our Company. We also continue to consider other strategic funding options for the longer term. The next six months promises to be a very exciting time as we seek approval from OMNIS to move forward with the exploitation phase of the Block 3104, over 105 years after oil was first discovered at the field."

Contact Information:

www.madagascaroil.com 

Senior Independent Director's Statement:

The first half of 2014 has seen good progress for the Company on many fronts. Operations at Block 3104 continue to focus on the SFP, including collecting and analysing data. Oil production has increased, initially from CSS cycling of the wells followed by the encouraging onset of steam injection support being observed in some areas of the SFP. 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 was disappointing, however this was not related to the thermal injection process and these three wells were returned to active status in a well-work programme completed in August 2014, thereby allowing the original nine-pattern five-spot steam-flood recovery mechanism to resume.

As at the end of August 2014 cumulative oil production from the SFP was 124,223 barrels of which 62,703 barrels were stored in the Block 3104 SFP storage tanks and available for sale. The SFP results continue to provide encouragement and have shown that average oil production rates of between 18-24 barrels of oil per day ("BOPD") per well can be expected from the CSS phase of well operation. The initial CSS phase will be followed by a planned conversion to steam-flooding. The steam-flood recovery mechanism is projected to enhance recovery factors compared with the CSS method and is expected to yield improved economic indicators versus the CSS method alone. The results from the SFP yielded sufficient information to enable Madagascar Oil SA to submit the Declaration of Commerciality under the terms of the PSC on 8 May 2014.

Following the Declaration of Commerciality, Madagascar Oil SA intends to submit the Block 3104 Tsimiroro Development Plan ("TDP") to OMNIS before 4 November 2014, being the 180 day deadline in accordance with the PSC. We are working closely with OMNIS and the Government of Madagascar to finalise the TDP and obtain an exploitation licence which will entitle Madagascar Oil SA to develop and produce oil from Block 3104 for a period of at least 25 years. We have welcomed the opportunity to work closely with OMNIS in the Working Groups over the past few months to ensure the phased approach we are proposing is understood. We are also very pleased to have obtained approval in August 2014 for the amendment to the PSC which we believe clarifies the steps required to pass from the current exploration period into the 25 year exploitation period.

Our Development Planning 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 Block 3104. These parameters have been developed by experts with proven worldwide proficiency in thermal field applications and will form the basis of the TDP. The proposed initial development phase is to 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 Block 3104. Progress of the TDP will be on a step-by-step basis as further information is obtained. Development drilling of the initial reservoir geological compartment, containing the existing SFP, is expected to commence in the second half of 2015 and continue through 2018, with the peak rate being dependent upon the average well rates achieved.Following the necessary Governmental approval of our plans, our drilling rig will be mobilised to perform a campaign of development evaluation well drilling. This campaign will include up to 30 new evaluation wells with the objective of substantiating the thermally effective oil-in-place in geological compartments close to the existing SFP. When the evaluation well drilling is complete, it is intended that the rig will then turn to drilling the Phase 1 development wells planned to commence as soon as possible thereafter.

On 21 May 2014, the Company received confirmation 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. The Company was delighted to welcome the new President of Madagascar, H.E. Hery Rajaonarimampianina, to the 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. We are in discussions with a local electrical power generation company, Jirama, and other end users over sales tests for Tsimiroro Crude. Our operations team aims to reduce the water content in the stored oil to below 0.3% which will allow Tsimiroro Crude to be introduced directly into in-country electrical power generation equipment.  Encouragingly, oil in storage in the first of the three 60,000 barrel storage tanks is achieving a specification BS&W content of It is intended that test sales of between 55,000 and 73,000 barrels of Tsimiroro Crude oil will commence during the remainder of 2014.

Our corporate social responsibility programme continues to be based upon the principles of sustainable development and consultation with the local population in the Block 3104 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 authorities or NGOs, support institutions such as child vaccination, eye clinics and health awareness campaigns with the presence of the SFP and associated logistics facilitates.

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 2.82 million man-hours without an LTI to 31 August 2014.

The Company continues to work on a financial strategy to secure the funds required to support the next phase of the Group's planned activities and is currently inadvanced negotiations with certain of our major shareholders with regard to an equity fundraising which is likely to be structured as a placing with a subsequent open offer. Whilst there can be no guarantee that this transaction will complete in the timetable envisaged (or at all) there has been support from the above-mentioned shareholders and a further announcement on this will be made in the near future. The Company is also actively looking at a number of other fund-raising options and further information will be provided to shareholders in due course regarding the financing of the Group's ongoing and future business plans. The Company requires additional funding to progress the Tsimiroro development and evaluation work in the medium term and to ensure current levels of operational spend can be maintained for the foreseeable future. This is discussed in more detail in the Note 1 to the Consolidated Interim Financial Statements on page 18.

Three new Board members were appointed in the first half of 2014, Teck Soon Kong and David Mahoney as Non-Executive Directors and Gordon Stein, our Chief Financial Officer, as an Executive Director. I am delighted to welcome them to the Board and would like to thank Dr Madjedi Hasan, who left the Board in May 2014, for his contribution to the development of the Company over the past year. The Company continues to conduct an active process of recruitment for a new CEO and we hope that we will be in a position to make an appointment soon. In the meantime, 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.

The Company is grateful to the Government of Madagascar including the Ministry to the Presidency of Strategic Resources ("Ministry") 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 development of Block 3104, alongside SFP operations which we plan to continue to operate for the foreseeable future to improve our understanding of the production potential of Block 3104.

Iain Patrick

Senior Independent Director

Operational Update:

The predominant activity of the Company has remained the operation of the Tsimiroro SFP which commenced steam injection on 8 April 2013. The purpose of the SFP is to gather information on the technical and commercial applicability of thermal recovery techniques in order to support the investment decisions that will allow a development of the Block 3104 hydrocarbon resources.

The initial phase of the SFP operation has involved applying CSS to all wells in the pilot area. The objective of this CSS period is to achieve well clean-up and mobilise the oil around the individual wellbore area in preparation for designating the well as a dedicated injection or production well during the continuous steam-flood phase. The CSS period has been a technical success in the first year of operation with 15 of the 16 designated production wells subjected to several CSS cycles with oil production rates typically improving cycle upon cycle. An initial period of limited steam generation availability and low steam injectivity was overcome through a process of careful commissioning of the steam generators and increasing injection pressures to reach target rates of 250-300 BWEPD steam injection per well. The designated continuous steam injection wells for the pattern steam-flood were subjected to fewer cycles until the desired 250-300 BWEPD injection rate could be achieved to allow continuous steam injection to take place. This has been attempted on all nine designated injection wells however a series of issues relating to the original drilling and completion of the wells in 2012 have resulted in a number of well integrity issues that have required injection wells ISF-4 and ISF-6 to be shut down and ISF-8 to be repaired.

An extensive data gathering system has been implemented including individual well steam injection parameters and flowing well production rates, pressures and temperatures. Routine temperature profiling of the three observation wells has yielded encouraging signs of a developing temperature response in the mid-reservoir section which is a key success factor for the SFP. One well, PSF-15, has experienced steam breakthrough and other wells such as PSF-1 and ISF-5 have demonstrated the steady temperature responses indicative of a working steam-flood. Other wells on CSS operations such as PSF-2,3,6,7,10,11 are demonstrating support from offset steam injection indicating the reservoir communication that is required for a successful steam-flood.

Continuous steam generation has been achieved and in January 2014 the Company switched to burning unblended Tsimiroro Crude in its steam generators. This is a major breakthrough as it has reduced the field diesel requirement saving a significant cost and generated confidence in Tsimiroro Crude as a clean-burning fuel. All four steam generators have been commissioned and are available for operations. The SFP operations crew, consisting of local Madagascar-sourced personnel under the supervision of experienced North American managers, have performed well with the new facilities and the commendable 2013 zero lost time incident ("LTI") record has continued into the first half of 2014.

The separation process for the produced oil and water is becoming a focus as the potential for achieving first sales from the SFP approaches. Separated oil is being stored in the oil storage tanks after going through two stages of separation first in the group line tester then the wash tank. The main domestic Madagascar end-user of HFO is Jirama, the state utilities provider. Jirama have a specification for HFO which includes a water content of less than 1%, which Tsimiroro Crude can meet when blended with a 14-16% diesel volume to reduce viscosity. A new-build crude blending and truck loading facility has been built in the Tsimiroro SFP to allow a HFO standard product to be transported from the plant. This facility was inaugurated on 18th June 2014 by the President of Madagascar, HE Hery Rajaonarimampianina, in a ceremony that was also attended by seven cabinet Ministers, several members of parliament, the General Managers of OMNIS and the National Environment Office, several local mayors and dignitaries from the surrounding village and regional populations.

The oil currently in storage in the first of the Company's three 60,000 barrel storage tanks is achieving a specification BS&W content of less than 1%. The operations department aims to reduce the water content in its stored oil to below 0.3% BS&W content, thereby enabling the Tsimiroro blended product to be directly introduced into in-country electrical power generation equipment.

Oil production rates from both the CSS process and continuous steam injection are being monitored by the Madagascar subsurface team, supported by thermal experienced reservoir experts. The team has experienced engineers in Madagascar from the Indonesian Duri steam-flood and thermal experts with direct experience of managing and modelling Californian and Canadian heavy oil thermal operations. Projections of oil production and steam oil ratio have been applied to the development scenarios for Block 3104. A revised geological interpretation has been completed using all available well, seismic, surface and airborne survey data. This updated structural model has also incorporated the latest petrophysical interpretations from all of the 135 well drilled by Madagascar Oil and, where data is available, many of the over 66 wells drilled by previous Operators. Reservoir dynamic modelling of the SFP performance has been performed to achieve a good quality production history match of the first year of operation. Predictions of future thermal recovery performance have been derived under both CSS and CSS plus steam-flood mechanisms. Quality engineering inputs to drilling and facilities designs have provided updated costings to allow commercial modelling to take place.

Block 3104 Development Planning Update

The Declaration of Commerciality was submitted to the authorities accompanying the Block 3104 Appraisal Report, on 8 May 2014. The Company is currently preparing the TDP for submission to the Authorities by 4 November 2014, in accordance with the terms of the Block 3104 PSC. Following which, under the PSC, approval of the TDP will allow the Company to enter the 25 year "Exploitation" period. The Company is working in co-operation with its partner, OMNIS, to co-develop this TDP. Under the present administration, OMNIS report to the Ministry. The Company have developed excellent working relationships with the Ministry and OMNIS and have also ensured the President is informed over the progress and plans for the Tsimiroro development. The TDP will be the first submission in the history of Madagascar and is being prepared in compliance with the PSC, international standards and in consultation with OMNIS. The plan brings together subsurface and production facilities definition along with the crude oil transport, environmental, financial, logistical, commercial and social plans necessary to achieve a successful major field development. Madagascar Oil SA has held regular Working Group meetings with OMNIS to discuss all aspects of the TDP since Madagascar Oil SA declared that the Block is a Commercial Discovery under the terms of the PSC. These meetings have been extremely beneficial to Madagascar Oil SA as it endeavours to ensure that the TDP complies with the requisite regulatory framework, which includes consultation with stakeholders. They also allow OMNIS the opportunity to contribute directly towards the TDP approach, structure and content.

Approval of the phased TDP will allow implementation of Phase 1 of the TDP. It is intended that long lead time items for the drilling of the first development wells and SFP facilities upgrades will be ordered following approval of the TDP. The Madagascar Oil drilling rig will be mobilised to commence a campaign of Development Evaluation Well drilling commencing thereafter. This campaign is expected to include up to 30 new evaluation wells with the objective of substantiating the thermally effective oil-in-place in geological compartments close to the existing SFP. When the evaluation well drilling is complete, it is intended that the rig will then turn to drilling the Phase 1 development wells, which is planned to commence shortly thereafter.

Financial Update:

Cash in hand at 30 June 2014 was $10.1million (31 December 2013: $23.7 million) plus further restricted cash balances of $1.1 million (31 December 2013: $1.1 million). The cash in hand has decreased significantly in the last 6 months due to cash expenditure on the acquisition of exploration and evaluation assets amounting to $10.0 million and $3.5 million of operational expenses.

Current cash (at date of reporting) is approximately $2.6 million plus further restricted cash balances of US$1.3 million. The Company is in advanced negotiations with certain of its major shareholders with regard to an equity fundraising which is likely to be structured as a placing with a subsequent open offer. Whilst there can be no guarantee that this transaction will complete in the timetable envisaged (or at all) there has been support from the above-mentioned shareholders and a further announcement on the fundraise will be made in the near future.

The total loss for the six month period was $5.9 million (six months ended 30 June 2013: $4.9 million) with the movement between the periods mainly as a result of foreign exchange movements of the functional currency to the transactional currency. Overall, the costs have remained consistent between the two periods.

Exploration and evaluation expenditures were $11.9 million (six months ended 30 June 2013: $13.5 million) primarily relating to the Tsimiroro SFP.

Close control is maintained of the Company's costs and variances from budgets have been greatly reduced with the introduction of new management reporting and control systems.

INDEPENDENT REVIEW REPORT TO MADAGASCAR OIL LIMITED

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014, which comprises the condensed consolidated statement of financial position, condensed consolidated statement of comprehensive income, condensed consolidated statement of cash flows, condensed consolidated statement of changes in equity and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the Company's annual financial statements.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the AIM Rules for Companies and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34, "Interim Financial Reporting" and the AIM Rules for Companies.

Emphasis of matter - going concern

In forming our conclusion on the condensed set of financial statements, which is not modified, we have considered the adequacy of the disclosures in Note 1 to the condensed set of financial statements concerning the Group and Company's ability to continue as a going concern which indicates that there is a material uncertainty regarding the outcome of the proposed fundraising activity intended to support the Group and Company's operations for the foreseeable future. Should the proposed fundraising activity be unsuccessful, the Group and Company may no longer be viable. This condition indicates the existence of a material uncertainty that may cast significant doubt about the Group and Company's ability to continue as a going concern. The condensed set of financial statements do not include the adjustments that would result if the Group and Company were unable to continue as a going concern.

PricewaterhouseCoopers LLPChartered AccountantsLondon

23 September 2014

Notes:

(a) The maintenance and integrity of the Madagascar Oil Limited's website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

UNAUDITED NOTES FORMING PART OF THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2014

1. Accounting policies

Basis of Preparation

The interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' and using policies consistent with International Financial Reporting Standards (IFRS and IFRIC interpretations) issued by the International Accounting Standards Board (IASB) as adopted for use in the European Union. The interim financial statements have been prepared using the accounting policies applied for the year ended 31 December 2013 and updated for those which are expected to be applied in the Group's statutory financial statements for the year ended 31 December 2014. Statutory accounts for the year ended 31 December 2013 were approved by the Board of Directors on 30 June 2014.

The condensed consolidated interim financial information should be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2013 which were prepared in accordance with International Financial Reporting Standards issued by the IASB as adopted for use in the European Union. A copy of these financial statements is available on the Company's corporate website (www.madagascaroil.com) or from the Company's registered office.

This condensed consolidated interim financial information has not been audited, but was the subject of an independent review carried out by the Company's auditors, PricewaterhouseCoopers LLP.

Going concern

The Group'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, Operational Update and Financial Update. The Group 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 Group and Company have 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 consolidated interim 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 Group and Company's ability to continue as a going concern. If as a result of this material uncertainty the Group and Company were 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 consolidated interim financial statements do not include the adjustments that may result if the Group and/or Company was unable to continue as a going concern.

Funding requirements for ongoing operations

The Group held $11.2m cash at the end of June 2014 with this including $1.1m of restricted cash. As the Group 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 and the Group's 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.

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. Accounting policies (continued)

The Company continues to work on a financial strategy to secure the funds required to support the next phase of the Group's planned activities and is currently inadvanced negotiations with certain major shareholders with regard to a significant fundraising which is likely to be structured as a placing and a subsequent open Offer. Whilst there can be no guarantee that this transaction will complete in the timetable envisaged (or at all) there has been strong interest from the above-mentioned shareholders and a further announcement on this will be made in the near future. The Company is also actively looking at a number of other fund-raising options. The outcome of the selected fund-raising option(s) cannot be predicted, and sufficient funds may not be forthcoming to fund the Group's operations. This represents a material uncertainty that may cast significant doubt over the Group and/or Company's ability to continue as a going concern.

The Directors have prepared cash flow forecasts which indicate that the Group and Company will require additional funding in the form of equity within the next 9 to 12 months in order to meet their commitments as they fall due and to fund the expenditure required to progress the licenses held to cash generation.

The Company is in advanced discussions with existing major shareholders to secure future financing arrangements in the form of equity instruments. However, the Directors appreciate that this lack of formal agreements mean there can be no certainty that the additional funding will be secured within the necessary timescale. Nevertheless, with the expectation of the Company formally agreeing new funding from its major shareholders, the Directors have a reasonable expectation that there are likely to be adequate resources to continue trading for the foreseeable future and have therefore concluded that it is appropriate to prepare the consolidated interim financial statements on a going concern basis.

Intangible exploration and evaluation assets

Exploration, evaluation and development expenditure is accounted for under the 'successful efforts' method. The successful efforts method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised. Exploration and evaluation costs are valued at costs less accumulated impairment losses and capitalised within intangible assets. Development expenditure on producing assets is accounted for in accordance with IAS 16, 'Property, plant and equipment'. Costs incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.

Changes in accounting policy

These interim financial statements should be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2013. The only amendment in accountancy policies are for the following policies adopted:

IFRIC 21 - 'Levies' provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' and those where the timing and amount of the levy is certain. The interpretation was adopted on 1 January 2014.

IFRS 10 - 'Consolidated Financial Statements'. This standard establishes a single control model that applies to all entities and includes an exemption from consolidation of subsidiaries meeting the definition of an investment entity. The standard was adopted on 1 January 2014.

IFRS 11 - 'Joint Arrangements' was adopted on 1 January 2014. This standard outlines the accounting by entities that jointly control an arrangement. The joint arrangement with TOTAL on license 3102 - Bemolanga is not an incorporated entity nor does it have a separate financial structure therefore management have treated this arrangement as a joint operation and will continue to account for the this using the proportional consolidation method. There is therefore no financial impact with the adoption of IFRS 11.

IFRS 12 - 'Disclosure of Interests in Other Entities' was adopted on 1 January 2014.

There has been no financial impact of the adoption of these standards or interpretation on the financial statements for the six months ended 30 June 2014, nor on comparative periods.

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

2. Financial reporting period

The interim financial statements for the periods 1 January 2014 to 30 June 2014 and 1 January 2013 to 30 June 2013 are unaudited. In the opinion of the Directors the interim financial statements for the period present fairly the financial position, and results from operations and cash flows for the periods and are in conformity with International Financial Reporting Standards as adopted by the European Union incorporated within the Group's accounting policies consistently applied. The interim financial statements incorporate comparative unaudited figures for the interim period 1 January 2013 to 30 June 2013 and the audited financial year ended 31 December 2013.

3. Property, plant and equipment

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

4. Exploration and Evaluation Assets

During the Exploration Period of the existing Production Sharing Contracts the Group considers as intangible assets:

· The exploration works performed in the licenses 3104 Tsimiroro, 3105 Manambolo, 3106 Morondava and 3107 Manandaza

· The costs associated with the implementation of the SFP project on license 3104 Tsimiroro

The Tsimiroro licence is located 125km from the west coast of Madagascar. On the 8 May 2014, MOIL declared to its partner OMNIS that Tsimiroro is a commercial discovery which has independently audited contingent oil-in-place of 1.7 billion barrels.

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. This 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 was conducted in 2009/2010 and the licence has an expiration date for the mining title of 29 June 2016.

The other 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. The fair value of these licences will be considered subsequent to the period end as they are due to expire on the 28 November 2014 and an impairment charge will be recognised if no extensions are made to the licences.

5. Non-current tax assets

VAT receivable is considered a non-current asset as over the next 12 months, the input tax is expected to exceed the output tax therefore the net assets are expected to increase.

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

6. Loss per share

Basic loss per share amounts are calculated by dividing the loss for the periods attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period.

Diluted loss per share amounts are calculated by dividing the loss for the periods attributable to ordinary holders by the weighted average number of ordinary shares outstanding during the period, plus the weighted average number of shares that would be issued on the conversion of dilutive potential ordinary shares into ordinary shares. The effect of the warrants and options are anti-dilutive in 2014 and 2013.

7. Share-Based Payments and Equity Sales

The Company issued no options (2013: 10,170,000 options) in the first half of 2014 to directors or employees. Share-based expense related to outstanding stock option plans and restricted shares totalled $238,363 for the interim period 1 January 2014 to 30 June 2014. Share-based expenses of $413,756 were recognised for the period 1 January 2013 to 30 June 2013 and $1,560,194 for the year ending 31 December 2013.

8. Financial instruments

Fair values of financial assets and financial liabilities - Group

Set out below is a comparison by category of carrying amounts and fair values of the Group's financial instruments. Fair value is the amount at which a financial instrument could be exchanged in an arm's length transaction. Where available, market values have been used (this excludes short term assets and liabilities).

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

8. Financial instruments (continued)

The directors consider that the carrying amounts of financial assets and financial liabilities which are recorded at amortised cost in the financial statements approximate their fair values for current and non-current loans.

The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in the market. For the purpose of estimating the fair value of financial assets maturing in less than one year, the Group uses the market value. For other investments, the Group uses quoted prices in the market. In relation to financial liabilities, since most loans are taken at variable rates or fixed rates that approximate to market rates, the fair value of loans approximates their carrying value. Set out below is a comparison of the carrying amount and fair values of the Group's financial instruments.

The different levels have been defined as follows:

Level 1: valued using trading prices (unadjusted) in active markets for identical assets and liabilities;

Level 2: valued using inputs that are observable for the asset or liability, either directly (that is as prices), or indirectly (that are derived from prices); and

Level 3: valued using inputs that are not observable for the asset or liability.

9. Functional currency

All amounts have been prepared in US dollars, this being the Group's functional currency and its presentational currency.

10. Commercial disputes

As highlighted in the 2013 Annual Accounts, Madagascar Oil SA ("MOSA") had received an initial VAT notification for the years 2007 - 2011 for disputed notional VAT (Foreign Services VAT) being applied to services provided by foreign suppliers outside Madagascar. Following negotiation a settlement of $4.476m (MGA 10.026 billion) was transferred to the Madagascan Tax administration in final settlement of the VAT dispute relating to 2007 - 2011 which was agreed definitively and the case now irrecoverably closed.

Management has recognised a provision in the interim financial statements for the best estimate of the expected 2012, 2013 and first half of 2014 settlement and penalties.

UNAUDITED NOTES FORMING PART OF THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS

11. Subsequent events

There are no significant subsequent events to disclose.

12. Capital commitments

As at 30 June 2014, the minimum work commitments for Block 3104 Tsimiroro had been fulfilled and the total outstanding minimum work commitments with respect to the exploration blocks were $750,000 (year ended 31 December 2013: $750,000). Bank guarantees have been established in respect of the Group's obligations for minimum exploration work commitments.

The license contracts for this block also include the following annual expenditure commitments:

Administrative fees

- Block 3104: $250,000 per year

- Three other exploration blocks: $162,500 per year per block

The Block 3104 administrative fees of $250,000 per year are only committed until the granting of an exploitation license under the terms of the Production Sharing Contract which is expected to be fulfilled before year end 2014.

Training fees

- Block 3104: $100,000 per year

- Three other exploration blocks: $50,000 per year per block

The license contracts as part of the joint venture with the group TOTAL for the license 3102 Bemolanga include annual expenditure commitments of $100,000 per year as administrative fees and $40,000 as training fees.

13. Related parties

Key management includes Directors (executive and non-executive), the Chief Financial Officer and the Chief Operating Officer. Key management compensation amounted to $525k for the six months ended 30 June 2014 (six months ended 30 June 2013: $935k) with a share based payment charge of $187k (six months ended 30 June 2013: $420k).

Corporate Directory

Directors

Iain Patrick (Non-Executive Director)

Richard Laing (Non-Executive Director)

David Mahoney (Non-Executive Director) (appointed 31 March 2014)

Al Njoo (Non-Executive Director)

Dr Madjedi Hasan (Non-Executive Director) (resigned 22 May 2014)

Teck Soon Kong (Non-Executive Director) (appointed 22 May 2014)

Gordon Stein (Director) (appointed 31 March 2014)