Nov 2, 2010
Executives
Clarence Cazalot - Chief Executive Officer, President, Director and Member of Proxy Committee Howard Thill - Vice President of Investor Relations & Public Affairs David Roberts - Executive Vice President of Upstream
Analysts
Edward Westlake - Crédit Suisse AG Xavier Cronin Katherine Minyard Mark Polak - Scotia Capital Inc. Evan Calio - Morgan Stanley Mark Gilman - The Benchmark Company, LLC Pavel Molchanov - Raymond James & Associates Paul Cheng Faisel Khan - Citigroup Inc Douglas Leggate - BofA Merrill Lynch Blake Fernandez - Howard Weil Incorporated
Operator
Good day, and welcome to the Marathon Oil 2010 Third Quarter Earnings Conference Call. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Mr.
Howard Thill, Vice President of Investor Relations and Public Affairs. Please go ahead, sir.
Howard Thill
Thanks, Cynthia, and welcome to Marathon Oil Corporation's Third Quarter 2010 Earnings Webcast and Conference Call. The synchronized slides that accompany this call can be found on our website, marathon.com.
On the call today are Clarence Cazalot, President and CEO; Janet Clark, Executive Vice President and CFO; Gary Heminger, Executive Vice President, Downstream; Dave Roberts, Executive Vice President, Upstream; and Garry Peiffer, Senior Vice President of Finance and Commercial Services, Downstream. Slide 2 contains a discussion of forward-looking statements and other information included in this presentation.
Our remarks and answers to questions today will contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance with Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, Marathon Oil Corporation has included on its annual report on Form 10-K for the year ended December 31, 2009, and subsequent Forms 10-Q and 8-K, cautionary language identifying important factors, but not necessarily all factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Please note that in the appendix of this presentation, there is a reconciliation of quarterly net income to adjusted net income for 2009 and the first three quarters of 2010, preliminary balance sheet information, fourth quarter and full year 2010 operating estimates and other data that you will find useful. On Slide 3, you'll see that our third quarter 2010 adjusted net income of $711 million was a 10% decrease from the second quarter of 2010 but a 63% increase from the third quarter of 2009.
The decrease from the second quarter was largely driven by the effect of reduced RM&T segment income. The increase in the year-over-year third quarter earnings reflects improved business results for most segments, the largest of which was the improvement in our Downstream operations as a result of increased refining and wholesale marketing gross margin and higher refining volumes.
Slide 4 provides details on the changes which resulted in the 10% decrease in second to third quarter adjusted net income. Pretax income increased for all three Upstream segments, while RM&T saw a decrease.
Income taxes and other items netted to a nominal negative impact. As shown on Slide 5, we had an 18% quarter-to-quarter increase in E&P segment income as a result of higher hydrocarbon sales and lower exploration expenses, partially offset by higher DD&A.
Higher income from lower tax jurisdictions contributed to the lower E&P effective tax rate of 53% for the third quarter. Slide 6 shows our historical E&P realizations and highlights the $1.13 per BOE decrease in our average realizations, driven by the $0.73 per barrel decrease in liquids realizations, while natural gas realizations increased $0.08 per mcf quarter-to-quarter.
Moving to Slide 7. Production volumes sold in the third quarter increased approximately 3% from the second quarter and 9% from the third quarter last year.
Third quarter production available for sale increased 8% from the second quarter and over 3% from the same quarter last year. During the quarter, we were underlifted in Europe by 12,000 BOE per day and overlifted in EG by about 4,000 BOE per day.
As of the end of the quarter, on a cumulative basis, we were 700,000 BOE underlifted in Europe and 2.4 million BOE underlifted in Alaska, with the rest of our operations being in a relatively balanced position. Turning to Slide 8, third quarter E&P segment income per BOE increased 13% compared to the second quarter of 2010, and was down slightly from the year ago quarter.
Slide 9 shows that field level controllable costs per BOE have remained relatively flat for the last several quarters, while exploration expenses per BOE dropped significantly this quarter, primarily driven by lower dry well expense in the Gulf of Mexico. Turning to Slide 10, the improvement in the Oil Sands Mining segment income third quarter to second quarter was primarily a result of higher volumes and lower turnaround costs.
The third quarter saw the return of the full quarter of operations at the Muskeg River Mine, as well as production from the Jackpine Mine, which began a phase start-up in the third quarter. The negative $61 million change in derivatives reflects the change from a gain of $53 million in the second quarter to a loss of $8 million in the third quarter.
For our Downstream business. Starting with Slide 11, I will compare our third quarter results against the same quarter in 2009 because of the seasonality in that business.
Third quarter 2010 segment income increased 80% from the same quarter last year. This was driven by higher margins and volumes, as well as better results at SSA, partially offset by income taxes and other miscellaneous expenses.
Slide 12 provides the details for both volumes and margins in the refining side of this business. The quarter's year-over-year crude oil and other feedstock costs were lower than the change in the average price of LLS, primarily due to the increase in the sweet/sour differential of $2.44 per barrel.
Our total throughputs were up over 21% quarter-over-quarter, primarily because of the Garyville Major Expansion. Our Refining and Wholesale Marketing gross margin of $0.0921 per gallon is based on the total consolidated refined products sold of 1,681,000 barrels per day or about 6.5 billion gallons for the quarter.
We estimate that the Garyville Major Expansion contributed approximately $0.011 per gallon to this margin, which is in line with our previous projections based on the Mars 2-1-1 crack spread. And to finish out segment reporting, the Integrated Gas segment income was $41 million compared to the $24 million recorded in the second quarter 2010.
Slide 13 provides a analysis of preliminary cash flows for the first nine months of 2010. Operating cash flow from continuing operations before changes in our working capital was slightly over $3.5 billion, which is net of a $240 million pension fund contribution.
Our cash balance was reduced by working capital changes from continuing operations of $560 million, primarily driven by Downstream operations. However, we expect to generate positive cash flow from working capital in the fourth quarter.
Year-to-date, cash capital expenditures have been $3.6 billion, disposals generated proceeds of $1.4 billion, dividends paid have been $526 million and debt repayments for the year have been $628 million. The cash balance at the end of the third quarter stood at slightly over $1.6 billion.
As shown on Slide 14, at the end of the third quarter of 2010, our cash adjusted debt-to-total capital ratio was 21%. And as a reminder, the net debt-to-total capital ratio includes about $235 million of debt service by U.S.
steel. We expect the overall corporate effective income tax rate from continuing operations to be between 49% and 54% for the full year 2010, excluding special items and the effect to foreign currency remeasurements of our tax balances.
I'll now turn it over to Clarence for some additional comments.
Clarence Cazalot
Thank you, Howard. As you now have seen, Marathon's operating and financial performance in the third quarter was strong, registering a 63% increase in adjusted net income over the same quarter of 2009.
And while we talk primarily about earnings and margins and volumes, I want to credit our employees for their continued focus on safe, reliable operations and controlling costs. We are, of course, disappointed by a more rapid and expected production decline in Droshky, and Dave Roberts will address that in some detail with you in just a moment.
But I think it's important to view this one disappointment in the context of our overall solid Upstream business which will still achieve our promised 4% compound average growth rate in production from 2008 to 2011. Although I know some have been concerned about a lack of visibility for our production beyond 2011, we are now able to forecast an additional 5% organic growth, and that's primarily liquids, from 2011 to 2012.
And as Dave will tell you in a moment, this growth is from ongoing projects, assets and opportunities in our portfolio. But we're not standing still.
We continue to build our position for organic growth beyond 2012 in key assets like the Bakken, the Anadarko Woodford and other unconventional liquid plays and in new exploration areas like Poland and Kurdistan. As for our 2010 capital and exploration spending, we expect to spend our budgeted amount of about $5.2 billion.
And while we won't announce our final capital plans for 2011 and beyond until our board approves them in January, I can tell you we expect ongoing CapEx to be in the $5.5 billion per year range that we've outlined for you before. Consistent with what we've done in the past, we're continuing to high grade our Upstream portfolio, and they sell or joint venture certain assets to reduce risk and/or generate funds for redeployment.
And to the extent we generate free cash flow in excess of our spending, our priorities continue to be maintaining a strong balance sheet and to return cash to our shareholders. And now I'll turn it over to Dave for more details on Droshky and our overall Upstream business.
David Roberts
Thanks, Clarence. The success in delivering the Droshky project in July well ahead of our planned dates and 30% under the sanction budget has been tempered by poorer than expected reservoir performance from the development.
And inherent risk in the products of this type, reservoir compartmentalization, as well as an apparent lack of aquifer support, have been larger factors than anticipated. The Droshky development was modeled based on a nearby analog field, Aspen , that we had direct evidence was in pressure communication with our field.
Based on the pressure, flow and aquifer support history at Aspen, we anticipated similar reservoir performance at Droshky. The analysis we've done and continue to do shows the initial and subsequent engineerings have been carried out in the professional and quality manner, and I'm at present hard-pressed to offer could've-should've-would've scenario for this development.
As our pressures have fallen more rapidly than anticipated, we recognized our recoveries are going to be lower and our volume projections will have to be modified as well. Droshky averaged net 21,000 barrels of oil equivalent per day in the third quarter and is estimated to average net 31,000 barrels of oil equivalent per day in the fourth quarter.
As a result, we expect as reported our full year 2010 Upstream production to be approximately 413,000 barrels of oil equivalent per day, a testament, I think, to the overall strength of our global portfolio. In 2011, Droshky is expected to produce an average of net 15,000 barrels of oil equivalent per day, and we're guiding to $70 per barrel as a representative of DD&A rate for the remainder of 2010.
We'll give further guidance for 2011 as appropriate. Importantly, however, our portfolio is increasingly robust, and as Clarence said, our ability to sustain our production growth is intact.
I have included Slide 15 in the pack to reflect our previous commitment to production growth of at least 4% over the periods 2008 to 2011, a commitment we will meet. To address some apparent confusion over this slide, we consistently measure our production projections based on our ongoing business, removing the effects of A&D.
This methodology ensures our business remains focused on profitable growth and continued portfolio management for value. 2008 Upstream production, excluding divestitures, was approximately 380,000 barrels of oil equivalent per day.
And with our projected growth, actual gives the CAGR of 4.5% for 2008 through our midpoint 2011 projection. More importantly, turning to Slide 16, we show that we expect production in 2012 to grow by 5% over 2011, with the majority of this growth being liquids.
The production increases will come from our existing positions in Canada, the Bakken and Angola, as well as beginning contributions from new positions we are taking in both existing and new unconventional oil plays in North America. And we're positioning the company for further growth into the future.
Turning to Slide 17. I'm pleased to report that Marathon has in 2010 increased its acreage in the Anadarko Woodford play, mostly in the liquids-rich portion to almost 75,000 acres, with further line of sight to over 100,000 acres in the near term.
We've also acquired over 120,000 acres in the Niobrara play in the DJ Basin of Colorado and Wyoming. In addition, we've increased our Bakken position to almost 400,000 acres.
As we've said before, one of the attractions of these unconventional plays is the ability to dial up or dial down activity as needed. The large and growing number of future locations we list on this map is a great well stock, one that today we're using eight rigs to prosecute, but we could expect the number to potentially double in the next two years.
And as opportunities remain, our acreage acquisitions continue in all of these plays, as well as others in North American unconventional liquids. We are in many ways transitioning the portfolio, balancing the large projects we have in our international business, and those we expect to deliver from impact exploration with repeatable and sustainable unconventional businesses largely in North America.
Finally, on Slide 18, I highlight our most recent impact exploration play, the Kurdish Region of Iraq. The opportunity offers both near and long-term potential to Marathon.
With two wells currently drilling in our licensed areas, the potential for production as early as 2016 is achievable, and we believe a minimum success case could yield 50,000 barrels of oil equivalent per day net by the end of this decade, with total exposures for Marathon of over 400 million barrels of net resources. Also, in the area of impact exploration, many of you will certainly be wondering about our Indonesian program and our progress there.
We continue to drill the Bravo prospect, a high risk but large structure on the Pasangkayu block. We have been slowed at first because of mechanical issues on the rig, which have been remedied, and then by geologic challenges, which similarly impacted the Romeo prospect suspended in September.
On Bravo, we are now roughly at half the well total depth at this point and expect the conclusion of this well later in this month. All in, it's a quarter of considerable success tempered by Droshky.
What we are most pleased with is the resilience our base of assets provides us in terms of meeting our goals and the continued evolution of our business as we add more exposure to unconventional plays, especially those rich in liquids, and new impact areas in exploration, both of which had confidence to our projection that we can sustain 3% to 5% growth well beyond 2012.
Howard Thill
Thanks, Dave. I appreciate those comments.
[Operator Instructions] With that, we'll now open the call to questions, Cynthia.
Operator
[Operator Instructions] Our first question will come from Doug Leggate with Bank of America Merrill Lynch.
Douglas Leggate - BofA Merrill Lynch
I'm going to try a couple of questions, both related to production and I guess the Droshky. The first one is that, I guess as you look at your production guidance, there really hasn't changed all heck of a lot since your strategy, Dave.
And the additional color in 2010 is appreciated. But one of the key things that we watch is the margin associated with these barrels, and then particularly in light of Droshky, if you look at your margin in the U.S.
this quarter. It basically traveled some help from exploration, but when asked the margin, Droshky played a part.
As you look at your incremental production growth over the next year or so, the top line growth is one thing. But you have a portfolio dominated by very low margin assets, Libya, Norway, EG gas, I guess.
What is the top line growth? How does it translate to margin at the bottom line in terms of how you see the contribution from Oil Sands, Angola and so on?
David Roberts
Yes, I think, obviously, with the subtraction of the Droshky barrels, the key driver next year is going to be largely Oil Sands Mining. And so you would expect that margin to be a big driver from 2010 to 2011.
But we do have substantial growth out of the Bakken as well, which are better margins. But obviously, that is going to feature.
From 2011 to '12, what we would say is that our top to bottom, the top five growth areas year-to-year are going to be Angola, the Woodford play, Bakken, Ozona and followed lastly by Oil Sands Mining. So four of those five areas we would think are going to be much stronger margin plays.
So '10 to '11, I take your point. But '11 to '12 and beyond, particularly, as we view the strength of the liquids unconventional in the United States, we think we're going to have pretty good margin growth as well.
Douglas Leggate - BofA Merrill Lynch
My follow-up then is on Droshky. Obviously, this was always going to be a very high decline asset, Dave.
Obviously, it's a little faster than you thought on the side of things. Can you give us an idea what your trajectory is through the year next year?
I mean, where is it right now? What do you expect the exit rate 2010 to be?
What's your expectation through the course of 2010?
David Roberts
Well, I mean I think if you think about this thing like I said in the fourth quarter being 32,000 barrels a day net. That 31,000 barrels a day net, it gives you an idea of -- we expect the exit rate to be in that neighborhood.
And so the 15,000-barrel a day average next year should give you an idea with the typical 10% to 15% Gulf of Mexico decline, how this thing is going to play out over the year.
Douglas Leggate - BofA Merrill Lynch
When does the fourth well come on, Dave?
David Roberts
We should get that work over sometime in the first quarter. So my guess, February and March.
Operator
And Blake Fernandez with Howard Weil has our next question.
Blake Fernandez - Howard Weil Incorporated
My question is on the Bakken. I know you have six rigs running currently.
That's obviously going to become an increasing factor in your production growth going forward. What opportunity do you have to increase that rig count, if any?
David Roberts
I think we have opportunities. What we have said consistently is that we manage our rig count in these plays in order to maximize the return potential of them.
And of course, the macro conditions in the Bakken are pretty significant. The basin is now running close to 150 drilling rigs.
I think Marathon has said consistently that we think this is a basin that probably is more comfortable in circa 100 area. And so that pressure is putting a lot of cost pressure.
And you've seen this from some of our competitors in the basin in terms of being able to acquire and the cost of services. So we're going to be very prudent about trying to accelerate our growth there.
We're pretty happy with the growth that we're getting. And right now, we're very comfortable with the logistics service profile that we have out there in terms of being able to deliver our program.
So just building rate is a secondary concern to us.
Blake Fernandez - Howard Weil Incorporated
And then on Clarence's comment regarding a strong balance sheet and returning cash to shareholders. Obviously, we've got a fairly hefty divestiture coming here in the fourth quarter with the Minnesota downstream.
I'm just curious, any ideas on uses of cash, obviously, potential increases of dividend? Would share repurchases be on the table and maybe M&A?
Clarence Cazalot
Yes, I would say M&A is not on the table, Blake, but I think certainly, as we've said, dividend is a very high priority for us. As you know, we increased our dividend earlier this year.
It's considered every quarter by our board and is a very high priority for us. Stock buybacks, we've done in the past, I wouldn't rule them out in extraordinary cases where we have considerable excess cash.
But at this point, obviously, we have an outstanding capital program going forward, driving the organic growth that Dave talked about. That's our first priority.
And then again, to the extent, we have cash in excess of our spending, we'll look to distribute that to shareholders.
Operator
And moving on to Evan Calio with Morgan Stanley.
Evan Calio - Morgan Stanley
I just have a question for Dave, if you could walk me through Indonesian exploration. Maybe give us some color on why Romeo was suspended, if you guys intend to re-enter the well.
And if we look out towards 2011 ,any others wells in Pasangkayu and the expected spud dates in your Bone Bay block.
David Roberts
Okay, Evan. I guess, what we would say without getting into too much technical detail, what we've ran into in Indonesia is essentially a rebel field.
So you can imagine an unconsolidated formation of fairly large rocks. And this is somewhat unusual to be below the surface.
But it's roughly 6,000 feet of depth is where we've encountered this. And that caused us some of our drilling concerns as we move forward.
We basically moved off of Romeo, and we will return to that prospect probably in a different wellbore. We believe we're past it in Bravo now, and so we'll be back to normal drilling.
The next couple of weeks will tell that tale. We've learned a lot about how to deal with that, and so we'll move forward.
For 2011, we have two slots on the rig that we have contracted. One of the things that we'll look at is whether we'll drill additional wells around Bravo, depending on what the results are.
We certainly would anticipate going back to Romeo with one of those slots. And we look at getting into Bone Bay either late next year or early 2012.
Evan Calio - Morgan Stanley
And then a similar exploration question with regard to Iraqi Kurdistan. And I was wondering if you can give me some timeline.
I believe the Atrush 1, I think it was spudded in October, and as your expectation, that's a February result. And I'm not sure what Serang [ph] when you expected TD is there in either exploration which are other two blocks there?
David Roberts
We basically started the first well or our partners did in July, August. And as you'd recall, the last one was started in October.
It's early days for us in terms of the information that we're getting. And so it would not be possible to comment on how long it's going to take.
These things tend to be progressed in a very prudent fashion. We'll be able to give more color as we get a little bit more familiar with it on a go-forward basis.
So on the two blocks that Marathon has there, we've got a three-year period of time where we'll be doing geologic studies and seismic before we actually get on the ground drilling our wells. So again, early days for us, but we are all pleased that we actually have two wells going down in brand-new exploration block.
Operator
And moving onto Edward Westlake with Crédit Suisse.
Edward Westlake - Crédit Suisse AG
Just maybe firstly on the volumes. Are you able, at this point, given the number of well locations that you've identified in the presentation, to kind of give a long run volumes in each of the three plays that you're focused on in the North American business, Niobrara, Bakken and Woodford?
Clarence Cazalot
Well, Ed, what we try to do there, and to try to make our presentations more consistent with others, is we've used some industry averages for the resources per well that are available in these plays. I think we've been pretty consistent on projecting where we think the Bakken is going to get to over the intervening of period of time.
And so that's the only one that we're comfortable right now projecting volumes on. And Niobrara is just way too early.
We won't actually be getting out there until next year and drilling it. We would hope that we would be able to build the same type of profile that we have in the Bakken.
But again, it's too early to try to promise that kind of thing. And again, we've got our initial wells going down in the liquids-rich portion of the Woodford, so too early to project where the production growth is going to go there.
Edward Westlake - Crédit Suisse AG
And then just as a follow on a separate area, obviously, 1.2 billion barrels I think on risk in the Gulf of Mexico. Can you talk about your plans to get back to work there and how excited you are about your portfolio in the Gulf after Droshky?
Clarence Cazalot
Yes, I think we are still very excited. I think one of the things that is an obvious question is, does Droshky shake your confidence?
And the fact to the matter is, is that the Miocene sand plays segment is they are in Droshky and to a similar degree in Neptune have given us a lot of information in terms of how we should evaluate these things on a go-forward basis. But our view is that we still have good prospects, 20 plus that we need to drill in the Gulf of Mexico.
We'll see what they'll look like in terms of being continuous or discontinuous. And we remain very upbeat about the potential that we have in that portfolio.
We have submitted regional plans to the government to start the process of getting back to work and specific of re-permits for our Innsbruck, which is the well that we suspended at the start of the moratorium, as well as some of the work that we need to do to permit Ozona because that's obviously something that we need to do in terms of getting that development ready to roll into 2011. And we'll follow suit with other permits.
And I think the other thing that we would say is the rig that we have on the contract is in the Gulf, undergoing acceptance trials. And we'll see how that rig does in terms of its performance.
And our view is that we would like to be able to get back to work shortly, but a lot of that depends on how the permitting goes and the acceptance trials of the Noble Jim Day.
Operator
And Paul Cheng with Barclays Capital has our next question.
Paul Cheng
Dave, if I ask my two questions, can I just clarify, I may have misheard? The Droshky, DD&A, did you say $17 per barrels, $70 or $17, 1-7.
David Roberts
$70 million.
Paul Cheng
So you expect Droshky, you're only going to recover about 12 million, 13 million barrel?
David Roberts
We have taken a write-down, yes, Paul. We had 26 million barrels.
And right now, the proved reserves on the books, we're shelling 14 million with some upside for waterflood case and the well workover that we're going to do in February. So.
Paul Cheng
On Droshky, you said that you learned a lot. When you look back, as an hindsight is there any difference that you may have done it in terms evaluating on those two fields or in your development designs?
David Roberts
No, Paul, I think I was pretty clear. I mean, we've obviously looked at this pretty closely, leading up to this decision.
And subsequently, as the well rates have fallen off. And we think the use of the analog was a correct thing.
Obviously, the one thing that could've been different here is if you had the ability to do some production testing earlier, but we didn't have that option. And so if you had that capability, that would've been a way to figure this out early.
But again, I think we did what we could do, and we're pretty comfortable with the technical work that was done here.
Paul Cheng
Final question, on the unconventional shale play for the three -- can you give us the number of rigs for 2010, 2011 and 2012 either by basin or together?
David Roberts
Well, I think what I've talked about is we're currently running six in the Bakken. In my view is that number is going to be consistent similar to the question that I answered from Blake a little bit earlier because we're comfortable with that as a pace.
We have two running in the Woodford. That number could easily double or go higher.
And the Niobrara, we'll obviously start with one next year, and depending on success, it could go dramatically higher. But as I said, if you take the eight, I could see that easily doubling over the next couple of years across the three basins.
Paul Cheng
So Dave, you're talking about 2012...
Operator
Moving on to Faisel Khan with Citigroup.
Faisel Khan - Citigroup Inc
On the 2011 to 2012 growth rate, looking at that, about 5%, what are your expectations for Normay? I thought that -- and that would be a -- you start to see declines in that field in Alvheim and Vilje in that timeframe, it looks like maybe that's keeping pace.
David Roberts
Well, Faisel, we're running circa 80,000 barrels net out of our Norway businesses. We are going to see declines there, but they're going to be minimal, 4% to 5% a year.
So those will be declining businesses over the period that you're talking about. So they will not be added to our production but certainly not a significant decline item.
Faisel Khan - Citigroup Inc
On the Refining side of the equation, were you guys able to take advantage of the wider Canadian differentials in the quarter and also the diesel exports?
Clarence Cazalot
Yes, Faisal, we were. In fact, if you look at the differential, I believe the differential this quarter versus same quarter last year was about $2.44 better.
Obviously, a good portion of that would have been the Canadians.
Faisel Khan - Citigroup Inc
On the diesel exports?
Clarence Cazalot
In diesel exports, yes, we certainly have -- we are participating and sharing in the market of diesel exports with the new GME project in being able to meet the European spec. We certainly have been a big player in the diesel export market, and we expect to continue.
Operator
And Mark Polak is Scotia Capital has our next question.
Mark Polak - Scotia Capital Inc.
Just a quick question for you on Oil Sands. With the expansion coming online right now and Shell talking about shifting their focus a bit more to the MCHE side, can we expect seeing from you or would we maybe see, hear a bit more about the Namur and Birchwood as we head out the next couple of years?
And as a follow up to that, we'd love to hear your outlook both short and long term for heavy differentials and how that plays in the decisions on developing those assets or future downstream opportunities?
Clarence Cazalot
Okay, Mark. I'll let Garry speak to the differential outlook because obviously, from our comments earlier, we're bulls on liquid price.
And so we believe that these plays are going to continue to be valuable on a go-forward basis. But I think you're exactly right.
One of the things that we're going to be doing this winter is engaging in a pretty thorough delineation drilling program around our Birchwood assets. So we'll have some information that we'll put into our reservoirs team's hands beginning late the winter spring of next year to determine what we actually have there because we think, a, it's 100%.
We think it's a pretty good prospect from what we've seen once we get some of the drilling done. We'll be able to see if that actually is going to feature heavily in our plans on a go-forward basis.
So we're pretty keen to pursue the in situ agenda in Canada as well.
Garry Peiffer
I'll take the differentials. Mark, if you go back and look at the first and second quarter this year when the industry was filling up the Keystone pipeline and Enbridge pipeline, there's a lot of incremental demand.
But that incremental demand in our opinion helped to narrow the differentials. We would expect, going forward, and we don't see any pipeline expansion or really the market expansion beyond those two pipelines probably for at least three to four years, depending on when the expansion might go south of the Wood River cushion market.
But we would expect with additional production coming on, and you have to look at the production, how much of it is going through an upgrader in Canada versus how much will be really a drill that comes to the market. But we would expect those differentials to lighten back out as we go forward.
Mark Polak - Scotia Capital Inc.
And is it in percentage terms? There's something in your view as a good assumption long term?
Garry Peiffer
Well, you look here recently, they've kind of been in the 15% to 20% mark here recently, and take you back a few years come, and they were north of 30%. I believe the markets have opened up with a couple of new pipelines and more poking being available in the Midwest, but I don't see those widespreads that we had back in the '07, '08 period.
But I certainly think that you'll be in the 20% or a little bit greater type of a discount.
Operator
Moving on to Pavel Molchanov with Raymond James.
Pavel Molchanov - Raymond James & Associates
First, just kind of a macro point about the Gulf. We've seen a mixed bag of views from operators about what they think will happen to future cost because of the spill.
Just wanted to get your perspective on this.
David Roberts
Well, Pavel, I don't think there's any question that we think costs are going to go up. I mean there's going to be costs relative to protecting its liability, whatever kind of insurance consortium or individual insurance is required.
There's no question that the participation in some of the needed containment consortiums is going to add cost for our business. But I think more importantly is right now, the lack of understanding for what the pace of available permits is going to be.
We're going to put more time into the system and time and money in the Gulf of Mexico. So I would anticipate the costs are going to go up.
The real question is, for us, is we're anxious to see the rules and the activity settle so we can understand what that is because obviously, that's going to impact our future decisions in that problem.
Pavel Molchanov - Raymond James & Associates
And then on Kurdistan, I realize it's early of course, but can you give a sense of the kind of infrastructure you would need if you ultimately move into development mode?
David Roberts
Yes, I think there's actually more oilfield service companies in the province than it's probably broadly known. But I think what we would say is we're hopeful that as companies like Marathon make an entry into this play, that more companies that provide oilfield services and larger companies will flow into this arena, giving operators broader choices and service providers and also cost options.
So that's part of the issue around infrastructure, and one that we're not uncomfortable with now but certainly, we would like to see improved just like we do in all the basins we'd like to operate in. I think the key thing is going to be export capacity and how ultimately Kurdistan either accesses the pipelines in broader Iraq or comes up with alternatives that will allow them to secure their own export around.
There is no question that all these stuff is going to continue to go north to the Turkish lines that run across. That's been the historic province there.
It's certainly one that will be support. But that's going to be the critical issue in terms of developing oil and gas export infrastructure.
Operator
[Operator Instructions] And we'll move on to Mark Gilman with The Benchmark Company.
Mark Gilman - The Benchmark Company, LLC
Dave, can you give us an idea what your incremental acreage costs in the unconventional plays are running? You mentioned the 120,000 in the Niobrara, some additional acreage in the K9 Bakken as well?
David Roberts
Yes, Mark, without giving too much color, we've basically been able to access our acreage or additional acreage in the Woodford. It's up $2,500 an acre.
And the Niobrara, we're still under $1,000 an acre. So both plays, we're very comfortable with what we're doing in terms of acreage acquisition there.
Mark Gilman - The Benchmark Company, LLC
On Kurdistan, have you paid the $165 million? And is your deal had all sanctioned by the Iraqi government?
David Roberts
I'll answer the second first. It's our view that the Kurdish regional government has the authority under the Iraqi constitution to have entered into this agreement.
And it's agreement that I signed with the Prime Minister of the Kurdish regional government. We expect ultimately that these contracts will be consistent with Iraqi law reviewed by Central Commission.
But we also have high confidence that they'll ultimately be approved. We have not yet made the transfer of fund.
Mark Gilman - The Benchmark Company, LLC
And when will that occur?
David Roberts
Contractually, we're obligated to do that within a 90-day period of time. So we would expect to do it by the end of the year.
Mark Gilman - The Benchmark Company, LLC
Block 31 in Angola, there are two prominent players in that block, both of whom Total and ExxonMobil are attempting to divest their interest. Do you know what's going on there?
David Roberts
Well, I think I would call Paris or Lock [ph] but what I would say is that their percentage is probably relative to the size of their aggregate portfolios. It's not as meaningful as the 10% Block 31 is to us.
It's still an outstanding development on track in terms of being able to deliver in 2012. And there's not too many 150,000 barrels a day developments that are available in the world today.
Operator
And you have a follow up with Edward Westlake with Crédit Suisse.
Edward Westlake - Crédit Suisse AG
Just a follow-up on that Angola question. I think it is some of the subsea contractors might be saying that there's some delays for the next phases of the developments on the initial phasing might be outstanding, but the second phases might be slower.
Can you make any comments on that? And then just the underlift in the quarter, do we have $1 million number for that?
David Roberts
We don't have a dollar number on the underlift. What we give is the volumes, Ed, that we went through in the speech itself.
I can go to those again off-line again with you.
Clarence Cazalot
And with respect to Angola, we would direct any questions about the pace of future developments to BP because we're very satisfied with what they're doing and progressing the first development. And what we would say is they have a very sharp eye on future costs and obviously, trying to manage the existing developments, future developments in terms of what the existing cost environment is.
Edward Westlake - Crédit Suisse AG
Just on the strategy in the Upstream. Are you signaling more strongly an onshore focused as opposed to global exploration with these moves?
David Roberts
Well, I think what we've said is we have proven our capabilities in the Bakken. We needed some balance in terms of creating the supply wheel of activities that you get in the unconventionals.
We like the fact that there's a number of these that are liquids focused in the United States, particularly in areas that we're very comfortable in operating in. And we think it provides an appropriate balance, not only to our large-scale projects internationally, which are, as you know, huge cash flow drivers and earnings drivers for our business.
But we think, by signaling our intent to go into places like the Kurdish Region of Iraq, we committed to the fact that we're going to be in fact exploration players as well. So Marathon is still committed to the track that we've said consistently is we think we can deliver value through multiple channel.
Clarence Cazalot
Ed,this is Clarence. I think what you're seeing is an out intent to build what is defined, sustainable, predictable, as Dave said, scalable portfolio, driven by these unconventional resource plays, primarily domestic, but at the same time have a component of our activity around biggie exploration which a good deal of which will be Gulf of Mexico and international that gives us the opportunity to drive impact value through success there.
So it really is complimentary. They're not mutually exclusive.
We think they're complimentary of one another.
Operator
And our follow up from Doug Leggate with Bank of America Merrill Lynch.
Douglas Leggate - BofA Merrill Lynch
I had a follow-up on just one of the comments that Dave made on Droshky, if you don't mind. Dave, $70 DD&A was like about 5 million barrels of reserves next year produced on your target.
If you had 25 million barrels that you've now written down to 15 million, your gross was originally $60. What's the new gross?
David Roberts
Yes, actually, the net resource that we're focused on right now is about 19 million, and we would compare that to 34 million. So we'll have to get back to you on how that compares to the $60 previous.
Douglas Leggate - BofA Merrill Lynch
So if we apply a 25%, let's say, decline in 2012, you've pretty much written off the bulk of the expenditure. I'm just trying to get a feel for what DD&A looks like in the future production years in this field.
David Roberts
We'll get back to you on it, Doug, because I think the issue is that we have some incremental investments that we want to make, both with this workover that we're going to do. And then we are going to try to implement a waterflood out there as well that will change the quarter-to-quarter DD&A next year.
So we'll get some more color on that, as I indicated earlier.
Operator
Moving on to Kate Minyard with JPMorgan.
Katherine Minyard
One just a quick question on your production guidance range for 2011. It just looks like between the low side and the high side, it's a bit of a wide range.
We're just wondering if you could give us a little bit of insight into maybe some of the factors driving the width of that range. And I guess more specifically is whether there's anything we should be looking for earlier in the year that would help us narrow that range?
Or if you just expect it to narrow as the year progresses?
David Roberts
Kate, I think we tend to always give ourselves a little room so we can look at how projects are going to be delivered. But I think that the critical thing to think about for next year, since it's largely going to be driven by Oil Sands Mining, the real issue is when the upgrader is delivered for the project and when do we get through the shakedown period of time in terms of when that thing actually starts taking over.
Just to give an example, towards the latter part of this year, the new mine up there we think could produce anywhere on a gross basis a bitumen between 10,000 and 20,000 barrels a day. That's a pretty big range just because it's a startup process.
And then as the upgrader comes in, the real question is, is how quickly do you step-up to that 100,000 barrels a day there. So I would say that once we get a little bit more clarity on that in the first quarter of next year, my guess is the ranges will start coming in because there's not a lot of other moving parts.
Operator
Moving on to Xavier Cronin with Energy Intelligence Group.
Xavier Cronin
I wanted to confirm 26 million barrels for Droshky on the books you had originally, and you're now showing 14 million? Is that correct?
David Roberts
For the reserves. Yes.
Xavier Cronin
And that's 1 million barrels per day?
David Roberts
Million barrels equivalent. Reserves are in those numbers.
Xavier Cronin
And also on the diesel issue, just real quick, could you talk more about the GME project meeting the euro specs regarding your diesel exports, please?
Clarence Cazalot
Yes, prior to GME's new construction, our diesel units within all of Marathon's refine. We didn't have the ability to meet the European spec.
And now we can do that, and we're exporting a significant amount of our variable diesel to the foreign markets.
Xavier Cronin
Does that include ultralow?
Clarence Cazalot
Ultralow would be a part of that, yes. We only make ultralow out of Garyville.
But there's also an additional spec to be able to meet the European specs.
Operator
And now our follow up with Paul Cheng with Barclays Capital.
Paul Cheng
Dave, on your production guidance for 2012, what's the underlying base, the guide [ph], that you're using?
David Roberts
Paul, we've not changed from our view that we can maintain 6% to 8% base decline across our assets with the interest that we have.
Paul Cheng
And when you talked about the 2012, I think, you -- in the order of the contribution to the production goals in Angola, Woodford, Bakken and then Ozona and then Oil Sands, do you have a number that you can tie to each region that the five that you mentioned, what is the production growth that you expect for 2012?
David Roberts
Well, I think, Paul, we typically would shy away from that granularity. But just broadly, I would say they're all in the 5,000 barrels a day equivalent range per day.
And the only reason I'm giving you that kind of guidance is because it kind of goes to what we're talking about here, the depth and breadth of our portfolio. We're not overly dependent on single project.
Operator
And a follow up from Mark Gilman with The Benchmark Company.
Mark Gilman - The Benchmark Company, LLC
The impairment folks that was taken in the quarter, does that mean you're no longer pursuing the GTL opportunity?
Howard Thill
GTF?
Mark Gilman - The Benchmark Company, LLC
GTL, Howard.
David Roberts
It stands our gas to fuel project, and we continue to pursue that technology in terms of the research that we're doing in our lab. But basically, what we've gone into, and I think I've talked about this previously, is we're into more of a design phase of what it would take to actually scale this up.
So we have not abandoned the technology.
Mark Gilman - The Benchmark Company, LLC
The relationship or I guess, I should say, the net bitumen production guidance for the fourth quarter, in the 28 million to 34 million range, I guess, I have a little bit trouble understanding it operationally if you're not going to be selling any bitumen in the upgrader is not going to be coming on until sometime early 2011. Has anything changed in terms of your strategy on this?
David Roberts
No. Well, Mark, what we've said is that the upgrader can actually take more bitumen than we're capable of mining from the base mine from the Muskeg River Mine.
And so that's why it's ramping up because we're taking what bitumen we can to the initial upgrader. And then as the second upgrader comes on stream, we'll ramp up the mining operation even more, which is also why Shell came out a couple of weeks ago, and we reiterated in our release that we see the upside of somewhere around 85,000 barrels a day of mining capacity because we think the upgraders have that much more capacity in them.
Operator
And we have no further questions in our queue at this time. I'd like to turn the conference back over to you, Mr.
Thill, for any closing remarks.
Howard Thill
Well, Cynthia, we appreciate it. Thank you, all, for your interest in Marathon, and wish you a great afternoon.
Operator
And this does conclude our conference call today. We'd like to thank you for your participation.