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Dear Fellow Stockholders:
The year 2004 can be summed up in one word: progress. We
reached key milestones on several major projects that provide
a platform for future growth, including the sanctioning and
groundbreaking of our LNG project in Equatorial Guinea and
approval of our Alvheim development in Norway. Our exploration
program delivered outstanding results for the third year
in a row. Marathon Ashland Petroleum LLC (MAP) set several
operating records, capitalizing on a strong market environment
that produced the second most profitable year since its formation
in 1998.
 Delivering on Our Strategy
The year was marked by strong commodity prices, tight supplies of finished
product due in part to constraints in the U.S. refining system, and
an overall narrowing of the oil supply/demand balance in the face of
growing worldwide demand for energy. In light of these market factors,
each of the Company’s three business segments improved profitability
over 2003.
We continued to demonstrate success in our rebalanced exploration program,
with six announced discoveries, adding new natural gas and crude oil
resources at competitive finding costs of less than $1.75* per boe. Our exploration successes are rapidly moving forward to commercial developments such as our Alvheim project in Norway, and we anticipate moving the 2003 and 2004 successes
at the Neptune unit in the Gulf of Mexico to project sanction during
2005.
During the year, Marathon more than offset its 2004 production of 122
mmboe by adding net proved reserves of 221 mmboe, including approximately
136 mmboe through extensions, discoveries and other additions. At year
end, Marathon had estimated proved reserves of 1,139 mmboe. Our 2004
reserve replacement performance was driven by reserve additions in
Equatorial Guinea, where we added 162 mmboe of proved reserves. In addition, the Alvheim and Vilje developments in Norway and the Corrib
project in Ireland added approximately 80 mmboe of proved reserves.
Over the past three years, the Company has added net proved reserves
of 782** mmboe, excluding dispositions of approximately 280** mmboe, at very competitive finding and development costs of less than $6 per boe.
During 2004, Marathon continued to make significant progress advancing
key development projects that will serve as the basis for the Company’s
production growth profile in the coming years. Strategic development
projects were sanctioned and approved, including our plan of development and operation for the Alvheim project in Norway and the Corrib development in Ireland.
Our production was lower than expected in 2004, largely due to project
delays and weather-related downtime in the Gulf of Mexico. To lessen
the impact of this shortfall, we worked to offset cost increases resulting from inflationary factors to keep our operating and administrative costs low.
Development of our Equatorial Guinea assets into a significant core
area is progressing through our condensate recovery and LPG expansion
projects, which are nearly complete and constitute a major onshore gas-processing facility on
Bioko Island. By the end of 2005, we expect liquid hydrocarbon production from Equatorial Guinea to have risen by nearly 150 percent over 2004 average output.
Excluding the weather-related downtime, we delivered strong production
from our base assets in the United States during a time when the U.S.
natural gas market remains strong. This robust U.S. gas market is stimulating
increased activity and investment in the mid-America gas corridor,
where we hold substantial interests and where we are applying state-of-the-art
drilling and completion technologies to reduce costs and improve reservoir
productivity.
Our focus in our newest core area, Russia, has resulted in a 60 percent
production increase since we acquired these assets in 2003. We are
leveraging our geophysical, drilling and completion skills resulting
in significantly reduced drilling times and improved completions as
we develop these Western Siberian oil reservoirs.
Our continued exploration success coupled with ongoing development
of our base businesses and new core areas, provides defined production
growth that is expected to increase our average daily production by
an estimated compounded average growth rate of 5 to 9 percent between
2005 and 2008.
In the integrated gas segment, the sanctioning of our LNG Train 1 project
in Equatorial Guinea with GEPetrol was a significant milestone during
2004. Sanctioned in June, the project is on budget and scheduled for
first cargoes in late 2007. This is one of the most attractive LNG projects
in the Atlantic Basin with all-in LNG operating, capital and feedstock costs of approximately $1 per MMBtu, making it a significant value contributor with options
for further growth. At the Elba Island regasification terminal, we
secured a five-year LNG supply agreement with BP Energy Company, which provides both near-term earning
capabilities and long-term options for growth. In addition, the AMPCO
methanol plant in Equatorial Guinea, in which we have a 45 percent
interest, posted strong operating results, with both record volumes
and profitability.
On the downstream side, MAP had its second-best year in its seven-year
history, despite a tough first quarter with two of its largest refineries down for planned maintenance during a period
of strong margins. MAP’s ability to remain focused throughout
2004 on leveraging refining and marketing investments, expanding and
enhancing its asset base and controlling costs resulted in an outstanding
year. Performance highlights included record throughputs at its refineries,
averaging 1.11 million barrels per day; 11 percent growth in same store merchandise sales at Speedway SuperAmerica LLC,
and a 6 percent growth in Marathon brand gasoline sales volume. Other
key achievements included completion of the Catlettsburg Repositioning
Project and progress on the Detroit refinery expansion, scheduled for
completion in late 2005, that will increase refinery crude oil throughput
capacity to 100,000 bpd.
We also announced the planned acquisition of Ashland Inc.’s minority
interest in MAP during 2004. This acquisition is designed to complement
our strategy to remain a fully integrated company. Acquiring full ownership
of MAP would also provide us with substantial growth opportunities
and allow us to leverage access to the U.S. market. While we were not successful in closing this transaction during 2004, we and Ashland continue to discuss a possible modified transaction with the Internal Revenue
Service (IRS), which would likely result in a closing in the second
quarter of 2005 if successful.
Our strong financial performance this past year, combined with the
stock offering made to finance the MAP acquisition, provides Marathon
the financial flexibility to fund continued investments in new and
existing core exploration and production operations, as well as our
emerging integrated gas business.
 Positioned for Future Growth
Turning to 2005 and beyond, Marathon will stay the course on the strategies
we have set in motion. We are confident Marathon is on the right track
to address the numerous challenges faced by our industry as world demand for energy continues to grow. The world’s appetite for oil and
natural gas has outstripped the industry’s ability to replace
produced reserves through exploration for several years while exploration
and development costs continue to rise. The growing demand for petroleum
products, especially natural gas, creates a challenge to link stranded
gas resources with growing markets.
The industry’s ability to tap and deliver resources will require breakthrough technologies
in exploration, development, transportation and hydrocarbon conversion.
Also, projects are growing ever larger and more complex, requiring
stronger project management skills and balance sheets.
As discussed earlier, Marathon has made great strides in the area of
exploration success through our refocused exploration program, but exploration success alone will not
be sufficient to replace Marathon’s or the industry’s current
rate of production. Access to resources, both existing and potential,
will play a significant role in replenishing the resource base necessary
to continue to meet the world’s energy needs.
Our focus on linking the world’s stranded resources, those with
little or no domestic market, with the world’s consuming markets
is positioning us well to capture additional value. Our potential re-entry to the prolific Sirte Basin
in Libya is one such opportunity. Additionally, we have made great
strides in our strategy to commercialize stranded gas through projects
such as our existing methanol facility in Equatorial Guinea and our
low-cost LNG Train 1 facility under construction in Equatorial Guinea.
We continue to seek breakthrough technologies as demonstrated through
our gas-to-liquids project, which has proven its ability to produce ultra-clean transportation fuels and is moving closer to commerciality.
We continue to work to provide additional refining capability as demonstrated
through our Detroit refinery expansion, designed to help provide the
Midwest with much needed additional refined fuels.
We have the skill sets necessary to deliver these value-creating projects
and we have built a strong balance sheet, reducing our cash-adjusted
debt-to-total-capital ratio from a high of 48 percent in early 2002 to 8 percent at year-end 2004.
It is our clear intent to remain a fully integrated energy company,
maintaining a strong focus on exploration and production, building
on our integrated gas business and growing our refining, marketing
and transportation presence.
Living Our Values
Living our values begins with our commitment to protect the health
and safety of our employees, contractors and neighboring communities
and to minimize the environmental impact of our operations.
Helping us achieve our goals is a dedicated resource base of approximately
26,000 Marathon and MAP employees who continue to work with the highest
regard for our stockholders, partners and the communities where we
operate. Our commitment to social responsibility can be seen from Company-initiated
efforts to eradicate malaria in Equatorial Guinea, as well as a variety
of community outreach programs that cover a broad range of social support,
from funding a local hospital in the Midwest to assisting Houston families
in need during the holiday season.
Both Marathon and MAP delivered record safety performance during 2004 – highlighting our long-standing focus
on the safety of not only our employees, but also our contractors and neighbors. These record lows were achieved during
a period of major construction activity in both the upstream and downstream segments.
We continue to uphold the highest standards of business ethics and
integrity. Our focus on business integrity was nationally recognized
when MAP received the 2004 Better Business Bureau International Torch
Award for Marketplace Ethics. In addition, last year we initiated an
ethics and compliance training program for all employees.
Maintaining the highest standards of corporate governance is reflected
in our reputation and performance when compared to our industry peers
and others. In early 2005, Institutional Shareholder Services scored
Marathon as outperforming 89 percent of the companies in the Energy Indices and
68 percent of the companies in the S&P 500 in terms of corporate governance excellence.
In early 2004, we demonstrated our support for transparent business
operations by publishing a statement backing the Extractive Industries
Transparency Initiative (EITI). EITI supports transparent reporting
by governments of aggregated revenues derived from mineral resource
extraction. We believe that conducting business in a transparent manner
is in the best interest of countries, investors and the international community. Also during 2004, Marathon became a participant
in the Voluntary Principles on Security and Human Rights, which recognizes
the importance of the promotion and protection of human rights throughout
the world and engages in dialogue focusing on global security and human rights issues.
The combined Company and employee response to provide monetary relief to the victims of the Indian Ocean tsunami
disaster in late December is consistent with our principles of corporate
social responsibility, not only in the areas in which we conduct business, but wherever there
is a need. This effort resulted in a total donation of $1.1 million.
During the first half of 2005, we will publish our inaugural issue
of Living Our Values. This report will address many issues and policies
relating to environmental and safety reporting and performance, including
greenhouse gas emissions, corporate development and diversity programs,
as well as philanthropic programs and spending.
It is our demonstrated care and commitment to safety, the environment,
ethics and integrity that drives our business and will help us continue
to deliver on our strategies and the success of Marathon now and into
the future.
While we have achieved much progress in the past year, there are significant
challenges ahead. By maintaining focus on our proven strategy under
way, we are confident that 2005 will be a year filled with continued
success and value growth for our stockholders, employees and the communities where we operate. Thank you for your continued support
of Marathon.
Sincerely,
Thomas J. Usher
Chairman
Clarence P. Cazalot Jr.
President and Chief Executive Officer
March 9, 2005
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| * |
Finding cost per boe is not a measure under generally accepted accounting principles ("GAAP"). There is no corresponding GAAP measure to which it can be reconciled. |
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| ** |
These amounts include 7 mmboe of net proved reserve additions and 19 mmboe of dispositions related to equity investees |
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