Marathon Oil Corp. completed drilling all four development wells on the deepwater Gulf of Mexico (GOM) Droshky project, but onshore spending has been curtailed because of lower natural gas prices, the producer said Monday.

Well completions at the Droshky project are under way and production is on track to begin in 2010, Marathon said. Droshky’s peak net output is estimated at 43 MMcf/d of natural gas and 45,000 b/d of oil. Droshky and Ozona, another deepwater discovery, were sanctioned by Marathon last fall (see Daily GPI, Oct. 31, 2008). Droshky, whose development costs were estimated at around $1.3 billion, is in 2,900 feet of water in Green Canyon Block 244, about 140 miles south-southwest of Venice, LA, and 18 miles southeast of Royal Dutch Shell’s Bullwinkle platform. Output from Droshky is to be tied back to Bullwinkle.

Progress on the Droshky development was one of the few North American highlights in Marathon’s 2Q2009 earnings report. Like many of its peers, Marathon’s quarterly earnings were hammered by lower natural gas and oil price realizations. Net U.S. gas sales also fell, down by 66 MMcf/d quarter/quarter after the company said it cut back on “domestic investments” because of lower gas prices.

“A continued focus on high mechanical reliability and cost control contributed to our overall solid operating performance,” CEO Clarence P. Cazalot Jr. noted. “And, in spite of challenging global economic conditions, Marathon continues to maintain a very solid financial position, aided by the value captured from selective asset sales.”

Net income was $413 million (58 cents/share) in 2Q2009, compared with $774 million ($1.08) in 2Q2008. Worldwide, the company’s exploration and production (E&P) segment achieved a 12% quarter/quarter increase in production available for sale from continuing operations. However, lower natural gas and oil price realizations, coupled with asset sales, weighed on earnings, which fell to $220 million in the quarter from $822 million in the year-ago period. The producer’s average realized U.S. gas price was $3.60/Mcf in 2Q2009, compared with $8.66 a year earlier. Average U.S. oil prices achieved in the period fell to $53.25/bbl from $109.85.

U.S. E&P operations lost $41 million in the quarter versus earnings of $359 million in 2Q2008, as revenues plunged 60% on lower commodity prices. Marathon’s net U.S. gas sales fell quarter/quarter to 365 MMcf/d from 431 MMcf/d. U.S. hydrocarbon liquids sales rose slightly to 64,000 boe/d from 63,000 boe/d.

U.S. depreciation, depletion and amortization (DD&A) jumped to $271 million in 1Q2009, up $100 million from the year-ago period. The Gulf of Mexico Neptune development, which ramped up in July 2008, added $90 million of DD&A quarter/quarter. Also contributing to the loss were $28 million in pre-tax expenses on the partial impairment of a natural gas field in East Texas, a rig cancellation in the Bakken Shale and a loss on a sale. Marathon said it “does not anticipate any additional cancellations for the remainder of the year.”

Worldwide oil and gas sales volumes from continuing operations averaged 436,000 boe/d in 2Q2009, compared with 347,000 boe/d in 2Q2008. Total international gas sales were up to 590 MMcf/d from 558 MMcf/d in 2Q2008. International developments and increased liquefied natural gas (LNG) sales volumes in Equatorial Guinea lifted total gas volumes, but the results were partially offset by lower U.S. gas production investments, Marathon said.

The company’s integrated gas segment, which includes LNG, reported profits plunging to $13 million in 2Q2009 from $102 million in 2Q2008, mostly on lower price realizations.

“The LNG sales contract in Equatorial Guinea has a Henry Hub basis, so the approximately 65% decline in this index had a dramatic effect on LNG profitability,” Marathon said. The LNG facility in Equatorial Guinea, in which Marathon holds a 60% stake, achieved operational availability of 99.6%, the company said. Marathon reported net LNG sales of 6,611 metric tons/d, compared with 6,401 metric tons/d in the year-ago period.

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