Exploration and Production
Marathon estimates that oil and natural gas production for the fourth quarter will total approximately 328,000 barrels of oil equivalent per day (boepd). This estimate is slightly above previous guidance of 325,000 boepd.
In the Gulf of Mexico, two facilities were shut-in for all or part of the fourth quarter. The Petronius production facility remained shut-in due to damage sustained from Hurricane Ivan in the third quarter. Prior to Hurricane Ivan, Petronius was producing approximately 25,000 boepd net to Marathon. Petronius production is not expected to resume before the end of the first quarter 2005, and could take longer depending on the progress of repairs to the facility.
In early December, production from Camden Hills, also in the Gulf of Mexico, was shut-in due to the shut-down of the Canyon Express gas system for repair of the methanol delivery system. Prior to the shut-down, Camden Hills was producing approximately 45 million cubic feet per day net to Marathon. Production is expected to resume during the first quarter 2005.
While crude oil and natural gas market price indicators have remained strong during the first two months of the quarter, actual price realizations have been negatively impacted by widening differentials for sour crudes as compared to the third quarter 2004. During the fourth quarter, and reflecting the absence of Petronius sweet crude production, approximately 80 percent of Marathon's domestic crude oil production was made up of sour crudes. Marathon's actual crude oil and natural gas price realizations also vary from these market indicators primarily due to other product quality and location differentials.
Estimated exploration expense for the fourth quarter remains within previous guidance. U.S. exploration expense is estimated to be $20-25 million, and international exploration expense is estimated to be $30-35 million.
The company estimates a non-cash mark-to-market gain of approximately $110 million on its two long-term gas sales contracts related to Marathon's Brae gas production. This gain is a result of the weakening of the 18-month forward gas price curve in the United Kingdom during the fourth quarter as compared to the third quarter 2004, and the annual resetting of these contracts on October 1.
Due to the volatility of the forward gas sales curve in the United Kingdom Marathon will continue to exclude these non-cash mark-to-market gains and losses related to these United Kingdom contracts from "net income adjusted for special items."
Preliminary estimates indicate net reserve additions for 2004 will be approximately 215 million barrels of oil equivalent (boe), significantly more than the approximately 120 million boe of production during 2004. Capital and exploration costs related to these reserve additions are expected to be in- line with previous guidance.
In accordance with our normal year-end practices we continue to test for possible financial impairment. Those assets most likely subject to impairment, if any, are the Russian and Powder River Basin assets.
Refining, Marketing and Transportation
Market indicators for refining margins (crack spreads) in the Midwest and Gulf Coast weakened during the fourth quarter 2004 as compared to the third quarter 2004 as reflected in the attached table. However, when compared to the fourth quarter 2003, the crack spreads were slightly stronger during the fourth quarter 2004.
As previously noted, the difference in the price of sweet and sour crudes were wider in the fourth quarter 2004 than either the third quarter 2004 or the fourth quarter 2003. While these wider differentials negatively impacted margins for the exploration and production business, they benefited MAP in the fourth quarter 2004 as compared to the other two quarters noted, since approximately 60 percent of the crude oil MAP utilizes in its refineries is sour.
Crude run rates remained strong and are estimated to average approximately 970,000 barrels per day for the fourth quarter 2004. The Speedway SuperAmerica LLC gasoline and distillate gross margin has averaged approximately $.1090 per gallon during the first two months of the fourth quarter of 2004, which is lower than both the third quarter 2004 and the fourth quarter 2003 averages.
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