Marathon to buy Western Oil Sands, gain Athabasca stake

Marathon Oil Corp., which is increasing capacities of its US refineries to handle heavy feedstocks, has agreed to buy Western Oil Sands Inc. for $6.5 billion (Can.) in a cash-and-stock deal that gives it a strong position in the Athabasca oil sands of northern Alberta.

By OGJ editors
HOUSTON, Aug. 1 -- Marathon Oil Corp., which is increasing capacities of its US refineries to handle heavy feedstocks, has agreed to buy Western Oil Sands Inc. for $6.5 billion (Can.) in a cash-and-stock deal that gives it a strong position in the Athabasca oil sands of northern Alberta.

Western holds a 20% interest in the Athabasca Oil Sands Project (AOSP), a joint venture operated by Shell Canada, with a 60% interest, and including Chevron Canada, 20%. The project includes the Muskeg River mine north of Fort McMurray, Alta., and the Scotford upgrader near Edmonton (see map, OGJ, July 9, 2007, p. 43).

The mine, operated by Albian Sands Energy, can produce up to 155,000 b/d of bitumen. Five capacity expansions are planned, taking maximum output eventually to 770,000 b/d. The Scotford Upgrader, 493 km south of the mine and connected by the Corridor Pipeline, can produce 140,000 b/d of synthetic crude oil and 60,000 b/d of vacuum gas oil.

Marathon will gain interests in more than 300,000 gross acres, of which an area of over 200,000 acres is expected to be developed by mining. The other acreage holds potential for in situ development.

The reserves total net to Marathon in acquired mining projects is estimated at 436 million bbl of bitumen. The net resource from the Muskeg River mine and five planned expansions is estimated at 1.5 billion bbl of bitumen. A further 500 million bbl of net resource is ascribed to other mining expansion on this acreage.

Marathon estimates the net bitumen resource of acquired in situ acreage at 600 million bbl. It will become operator with a 60% interest in a 26,000-gross acre project and gain a 20% working interest in the 75,000-gross acre, undeveloped Ells River project operated by Chevron 42 km southwest of the AOSP acreage.

Downstream integration
In a statement, Marathon stressed the potential integration of oil sands production with the upgrading of its US refineries.

The company is conducting a front-end engineering and design study of a project to increase crude capacity at its 100,000-b/d Detroit refinery by 15,000 b/d and to add a 28,000-b/d heavy oil coker and associated units.

In a conference call, Ken Matheny, vice-president of investor relations and public affairs, said the unfinished study indicates that "we can process an incremental 80,000 b/d of heavy sour crude at Detroit for less than half of the capital investment needed to build new upgrading capacity in Alberta."

The company is evaluating similar projects at its 70,000-b/d St. Paul Park, Minn., and 192,000-b/d Robinson, Ill., refineries. Its 245,000-b/d Garyville, La., refinery and the 180,000-b/d expansion under way at that site also can run Canadian heavy crude.

Marathon will assume Western's debt, which as of June 30 was $700 million. The acquisition is subject to approval by Western shareholders and regulators.

Closing is expected in the fourth quarter. The acquisition agreement requires Western to spin off WesternZagros, a wholly owned subsidiary with a production sharing agreement from the Kurdistan Regional Government covering 524,000 acres in northern Iraq.

Western said it will implement the spin-off by distributing shares in a new company, WesternZagros Resources Inc. to its shareholders when the Marathon deal is completed.


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