Answering analysts’ concerns that its exploration and production business is stagnating, Marathon Oil Co. announced Thursday it will ramp up capital spending this year by almost half a billion dollars, to $2.98 billion from $2.5 billion in 2004. Oil and natural gas production is forecast to grow at an average rate of 3% over the next three years, and reserves replacement will hit at 130% a year, the company said.

At its annual analyst meeting in New York, the Houston-based producer said it would maintain its exploration in its core regions of the United States and Europe while developing new resources offshore Norway, in Russia and in Equatorial Guinea. Once development is in place, Marathon’s capital budget will fall to $2.74 billion in 2006 and $2.39 billion in 2007.

“With a 70% exploration success rate during the past two years and the addition of approximately 700 million barrels of resource through the drill bit since 2001, we are well positioned to realize profitable growth from future developments.” said CEO Clarence P. Cazalot Jr. He explained that with its recent exploration successes, Marathon has achieved a three-year average reserve replacement ratio of 190% at a finding and development cost of $5.71/boe.

He noted that the company’s vision, business model and strategy, which it established in 2002 and reiterated in 2003, remain unchanged. He also told analysts that Marathon’s “forward view” of the energy industry’s business environment has been “validated” by actual events. “Underpinning our vision, business model and strategy is the recognition that access to resource is the most critical challenge facing international oil companies.”

The hike in capital spending this year reflects the ramp-up of exploration drilling offshore Norway and more natural gas drilling in the United States, said Phil Behrman, senior vice president for worldwide exploration. Norway and western Siberia are expected to contribute about 20% to total production in 2005 and close to 50% in 2008. By 2008, new projects off Norway and in the Gulf of Mexico are expected to add 70,000-115,000 boe/d. Once the new regions begin production, output growth is projected to be 5-9% a year.

In its integrated natural gas business, Marathon is on track with its new natural gas liquefaction plant to be located in Equatorial Guinea, which was 20% completed at the end of 2004. It also has committed 75% of the $1.4 billion budget toward completion. Marathon also has set up an agreement with the government of Equatorial Guinea to bring in a new equity partner that would own more than 13%. The Equatorial Guinea LNG Train 1 project which is on schedule with first deliveries of liquefied natural gas expected in late 2007.

Marathon also reported that its Petronius platform in the Gulf of Mexico is expected to return to production in March. The deepwater platform was damaged by Hurricane Ivan last September, and it has contributed to the company’s loss of 10,000 boe/d. The platform is jointly owned and operated by ChevronTexaco and it has the capacity to produce more than 60,000 bbl/d of oil and 100 MMcf/d of gas. It is located in the Viosca Knoll, about 130 miles southeast of New Orleans.

“Marathon’s strategic intents remain unchanged,” said Cazalot. “We intend to remain integrated across the entire value chain, target mid-cycle return on capital employed at greater than 10%, retain a substantial asset position, maintain a cash-adjusted debt-to-total-capital ratio below 40%, and achieve earnings per share growth on a flat price and margin basis.”

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