The government has postponed indefinitely an auction of 225 hydrocarbon exploration blocks in the country's territorial waters in the Indian Ocean. This is probably in large measure a consequence of the damage caused to investor confidence by the authorities' treatment of a US-owned firm, Madagascar Oil. The transitional government has threatened the firm with the expropriation of all its permits except for Block 2 (Bemolanga), which is operated by a French major, Total, after it acquired a 60% stake from the US company. In March Madagascar Oil declared force majeure on four production-sharing contracts relating to on-shore blocks 3104-3107. Block 3104 includes the important Tsimiroro project. Subsequently, trading of the company's shares on the London stockmarket was suspended. Madagascar Oil has since been subjected to an official audit to ensure it meets all the conditions of the contracts, the results of which have not yet been published.

The HAT's threat to revoke the firm's exploration rights may be related to the apparently generous nature of its contract, which reportedly entitles Madagascar Oil to 99% of the revenue during the first ten years of production, dropping to 80% for the next ten and 70% for the following decade. However, contracts are often structured to allow an investor to recoup much of its development costs before a project moves to long-term profitability. The fact that heavy oil is typically more expensive to develop than higher-grade crude oils may have resulted in a contract structure that appears unusually generous to the investor by oil industry standards. The government may also be motivated by concerns about the serious environmental impact of exploiting tar sands.

Madagascar Oil may offer to renegotiate the contract to give the government a higher share of revenue during the first ten years of production to resolve the dispute. However, this is far from certain. In early May the company instigated international arbitration proceedings against the government, although the firm's chief executive, Laurie Hunter, told a UK newspaper, the Financial Times, that Madagascar Oil still hoped to reach a negotiated settlement with the Malagasy authorities. According to the Financial Times, the HAT has offered the company about US$100m to buy back its assets, despite the fact that the firm claims to have spent US$215m developing the fields.

Investors may see Madagascar Oil as a special case that does not signal a further deterioration of the business environment. After all, other minerals projects are moving ahead. For example, the Ambatovy cobalt and nickel mine operated by a Canadian-listed firm, Sherritt, is set to enter production later this year, while an Australian company, Cluff Resources Pacific, is developing an open-pit gold mine. Meanwhile, another Canadian firm, Silvore Fox Minerals, has announced a US$10m joint venture in the copper sector, and China's Wuhan Iron & Steel (WISCO) is starting iron ore exploration in the Soalala region, for which it made a US$100m rights payment last year. Yet despite the apparent buoyancy of interest of investors in Madagascar's mineral resources, a prolonged dispute with Madagascar Oil will damage the already weak image of the country's business environment, which the World Bank ranks 140th globally in terms of ease.