Marathon Oil Corp. is building its downstream business in an agreement to buy Canada’s Western Oil Sands Inc. for about $6.2 billion (C$6.5 billion); however, company executives said Tuesday the additional refinery business will not dampen its zeal for exploration.
CEO Clarence Cazalot told analysts on a conference call that the Western Oil Sands transaction will give the Houston-based producer access to proved mining reserves of 436 million bbl of bitumen, adding a total net resource of 2.6 billion bbl of bitumen that can be recovered through mining or in-situ processing. Marathon also gains a 20% interest in the Athabasca Oil Sands Project and immediate net production of 31,000 bbl/d of bitumen.
Marathon will pay Western Oil Sands US$3.6 billion in cash plus 34.3 million shares or securities exchangeable for shares, and it will assume US$650 million of debt. In return, Marathon also gains a 60% interest and operatorship in a 26,000-gross-acre project and a 20% working interest in 75,000 gross acres in the Chevron Corp.-operated Ells River project. Collectively, these in-situ leases will add an estimated 600 million boe of net resource.
“On the mining side, in terms of upstream, this doesn’t have the below-ground risk or employ the same technology,” Cazalot said. “It is very low risk, but it will give Marathon steady reserve additions over many years to come and will certainly factor into our production profile. The real focus is in capturing the commercial value.”
Marathon “has a pretty robust profile through 2010, and this will continue our growth for a long time,” Cazalot said. “But we want to enhance that and add on to that. This is not a new component but really one we had built into our strategy for a long time.”
In the upstream, he said Marathon “will continue to grow through exploration, through integration, employing particularly gas commercialization, LNG [liquefied natural gas] growth, gas-to-fuels and employing technologies for stranded gas.”
A year ago, Marathon acquired an 8, 700-acre leasehold position in the Piceance Basin of Colorado, with net recoverable resources estimated to be more than 900 Bcf (see Daily GPI, July 21, 2006). The acreage, located in Garfield County in the Greater Grand Valley Field Complex, is flanked by, and on-trend with, adjacent production.
Steven B. Hinchman, Marathon senior vice president of worldwide production, said Tuesday the company has one rig operating in the Piceance that was spud a week ago. Marathon expects to drill about 700 wells in the basin over the next 10 years. The program has the potential to add nearly 180 MMcf/d of gas production by 2014, and first production is expected later this year.
“We’re just getting really started,” Hinchman said. In the Bakken play in North Dakota, he said Marathon has drilled about 18 wells to date, and it is evaluating about 10 prospect areas. “We will be moving from an evaluation phase to more aggressive development of the acreage we like,” Hinchman said.
Offshore in the Gulf of Mexico (GOM), Marathon said that based on the results of the three well penetrations, its Droshky discovery holds mean recoverable resource of 80-90 MMboe gross. The timing of initial production will be dependent upon delivery of key equipment (i.e., drilling rig and subsea equipment) and regulatory approvals, but could be as early as 2010. Marathon holds a 100% working interest in the Droshky discovery.
At its Neptune development in the GOM, the mini-tension-leg platform hull has been installed, and the topsides were set in June. Subsea equipment installation, topsides hook-up and facility commissioning are in progress, and first production remains on schedule for early 2008.
Marathon and its partners also marked the first LNG delivery from the Equatorial Guinea LNG Train 1 production facility in the quarter. The project was completed six months ahead of schedule, and it earned “the distinction of being the fastest LNG facility ever built, from inception to first delivery, while maintaining an outstanding safety performance,” said Cazalot. “The plant not only allows the commercialization of the Alba field’s natural gas, but also provides a platform to create a potential regional LNG hub on Bioko Island, Equatorial Guinea.”
In the quarter, Marathon’s net income slipped to $1.55 billion ($2.25/share), from $1.75 billion ($2.08) in 2Q2006. Upstream segment income totaled $400 million, compared with $659 million a year earlier. Sales volumes during the quarter averaged 338,000 boe/d, and production available for sale averaged 345,000 boe/d.
U.S. upstream income was $173 million, down from $243 million in 2Q2006, primarily as a result of lower liquid hydrocarbon and gas sales volumes. Normal production declines and a planned turnaround at the Kenai, AK, LNG facility accounted for most of the decrease. In the United States, Marathon’s net gas sales totaled 460 MMcf/d net, down from 523 MMcf/d net a year earlier.
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