Marathon Oil Corp.’s CEO said this week that the company is cautiously reviewing what parts of the liquefied natural gas (LNG) supply chain offer the most value, and for now, will concentrate on producing natural gas and increasing its LNG regasification capabilities in the United States.

Speaking at the Howard Weil Energy Conference in New Orleans, CEO Clarence Cazalot said giving its LNG business a designation with Marathon’s “integrated gas” business was premature because the Houston-based explorer has yet to tie together a business package that would combine production, shipping, regasification and marketing.

Cazalot referred to the recent problems Marathon faced in trying to site and build an LNG receiving terminal in Baja California, Mexico, a deal that recently fell apart (see Daily GPI, March 2). However, Baja ultimately was “the right strategy but the wrong place,” Cazalot said, because Marathon does not have access to stranded gas in the Pacific basin.

“In Baja, the re-gas is the where the value is,” he said, and companies need “market access not liquefaction.”

One path Marathon is taking is to act as a producer but not as a shipper. For example, Marathon plans to produce gas in Equatorial Guinea because of the overall low costs. However, it signed an offtake agreement with BG Group plc, which gives BG the ability to buy Marathon’s gas at a price linked to the Henry Hub index for delivery through BG’s LNG terminal in Lake Charles, LA. The first LNG cargoes from Equatorial Guinea are scheduled for shipment to the United States in 2007.

Cazalot said Marathon “didn’t see any need to invest in shipping” because of BG’s regasification capacity at the Lake Charles LNG facility.

Because it has no plans currently to build LNG terminals, Cazalot said Marathon may consider expanding its throughput rights for processing capacity at the Elba Island LNG terminal in Georgia. There, Marathon would supply LNG through a second LNG train from West Africa that is scheduled to come on stream in 2009, he said.

Marathon also has an agreement with Qatar Petroleum, which could lead to a new project for a gas-to-liquids (GTL) and liquid condensate project as part of its North Field development there, Cazalot told analysts. The Qatar GTL project gives Marathon the advantage of a production-sharing contract with the government, which will allow for cost recovery. Cazalot added that Marathon’s GTL technology fits with Qatar’s desire to diversify its gas technologies.

In a new equity research report, Lehman Brothers analysts upgraded Marathon to “overweight” from “equal weight.” It also raised Marathon’s 12-month target price to $40/share from $36. The enhanced view, said Lehman analysts, reflected a forecast for higher oil prices. Lehman expects Marathon to post 2005 earnings per share of $3.05, up from its previous estimate of $2.40.

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