Q4 E&P Income not Enough to Save Marathon; Hopes High for '08
Marathon Oil's upstream segment income totaled $465 million in the fourth quarter of 2007, compared to $307 million in the fourth quarter of 2006, primarily as a result of higher liquid hydrocarbon realizations which were partially offset by lower liquid hydrocarbon sales volumes and increased exploration expenses. For the year, upstream segment income was $1.729 billion, compared to $2.003 billion for 2006, primarily as a result of lower liquid hydrocarbon sales volumes and natural gas realizations and increased exploration expenses, partially offset by higher liquid hydrocarbon realizations and natural gas sales volumes.
Sales volumes averaged 354,000 barrels of oil equivalent per day (boepd) for the fourth quarter of 2007 and 351,000 boepd for the full year 2007, and production available for sale averaged 352,000 boepd and 353,000 boepd in the same periods.
United States upstream income was $153 million in the fourth quarter of 2007 and $623 million for the year, compared to $167 million and $873 million in the same periods of 2006. Contributing to the decreases for both periods were increased exploration expenses and lower liquid hydrocarbon and natural gas sales volumes, partially offset by higher liquid hydrocarbon realizations. The largest sales volume declines in both periods were associated with expected production declines for Gulf of Mexico and Permian Basin properties. Exploration expenses increased $77 million in the fourth quarter of 2007 and $105 million for the year compared to the same periods of 2006, primarily as a result of expensing non-commercial wells on the Flathead prospect in the Gulf of Mexico in the fourth quarter of 2007.
International upstream income was $312 million in the fourth quarter of 2007 compared to $140 million in the same period of 2006, primarily due to higher liquid hydrocarbon realizations. International upstream income was $1.106 billion for the year, compared to $1.130 billion in 2006, primarily as a result of lower liquid hydrocarbon sales volumes and natural gas realizations, partially offset by higher liquid hydrocarbon realizations and natural gas sales volumes. The increase in Equatorial Guinea natural gas sales volumes due to the start-up of the EG LNG Train 1 production facility in the second quarter of 2007 contributed to the decline in the average realized natural gas price for the fourth quarter and full year 2007.
During 2007, Marathon added net proved liquid hydrocarbon and natural gas reserves of 88 million barrels of oil equivalent (mmboe), while producing 125 mmboe, resulting in a reserve replacement ratio of 70 percent. For the three- year period ended Dec. 31, 2007, Marathon added net proved liquid hydrocarbon and natural gas reserves of 516 mmboe, excluding dispositions of 46 mmboe, while producing 383 mmboe, resulting in an average reserve replacement ratio of 135 percent. (The proven bitumen reserves at the AOSP are not included in Marathon's estimated net proved liquid hydrocarbon and natural gas reserves, but rather are reported separately in the Oil Sands Mining segment.)
First production from the Alvheim/Vilje development in Norway is expected at the end of the first quarter of 2008, weather permitting. The peak net rate of approximately 75,000 boepd is expected to be achieved in 2008. The Volund development continues to make progress towards first production in the second half of 2009 and will be tied back to the Alvheim infrastructure. Marathon has a 65 percent interest in Alvheim and Volund and a 47 percent interest in Vilje.
In the Gulf of Mexico, development of Neptune continues to progress. First oil is expected by the end of the first quarter of 2008. Marathon has a 30 percent interest in Neptune.
Marathon is currently drilling an appraisal well on the Droshky discovery in the Gulf of Mexico. The Company has secured an additional year of rig capacity in 2009 for development drilling in anticipation of a 2008 project sanction. The timing of initial production will be dependent upon delivery of key equipment and regulatory approvals, but could be as early as 2010. Marathon holds a 100 percent working interest in the Droshky prospect.
Also in the Gulf of Mexico, Marathon was high bidder on 27 blocks at the Minerals Management Service's Central Gulf of Mexico Lease Sale No. 205 in October 2007. These high bids total almost $222 million net to Marathon.
During the fourth quarter of 2007, Marathon also completed the acquisition of more than 70,000 net leasehold acres in the Bakken Shale play in North Dakota. The acreage brings Marathon's total Bakken Shale leasehold to more than 320,000 net acres. Marathon currently has six rigs running in its Bakken program and ended 2007 with a net production rate of 2,600 boepd.
The Company commenced its Piceance Basin activity in western Colorado and currently has two rigs running. Marathon expects to drill approximately 165 total wells in the region over the next two years.
Marathon continues to grow an inventory of future growth opportunities with eight discoveries announced during 2007 in deepwater Angola. Announced in the fourth quarter, the Alho discovery was the 11th discovery on Angola Block 32 and the 26th overall discovery in Marathon's deepwater exploration program on Angola Blocks 31 and 32.
In addition, Marathon has been awarded two study agreements in Indonesia and farmed into additional study agreements, which could lead to the acquisition of new leaseholds at a future lease sale. The Company also signed a cooperation agreement with Naftogaz Ukrainy to study the potential of the Dnieper-Donets Basin in the Ukraine.
Marathon exited its remaining 10 percent interest in the Ash Shaer and Cherrife natural gas fields in Syria during the fourth quarter of 2007.
With the Alvheim/Vilje and Neptune developments coming online, Marathon expects 2008 production available for sale to increase to a range of between 380 and 420 boepd. (This production guidance does not include bitumen production from the AOSP, which will be reported in the Oil Sands Mining segment.) Despite the challenges encountered with major project delivery in this volatile environment, the Company continues to be on track to deliver compound average annual production growth of 6 to 9 percent from 2006 to 2010.
Operates 4 Offshore Rigs
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