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Vermilion buys Marathon’s stake in Corrib development

ENERGYCURRENT

By Matthew Donovan

6/24/2009 9:00:03 PM GMT

CALGARY, ALBERTA: Vermilion Energy Trust will purchase Marathon Oil Corp. subsidiary Marathon International Petroleum Hibernia Ltd. and its 18.5 percent interest in the Corrib natural gas development 83 kilometers (52 miles) offshore Ireland. The transaction is expected to close in the second half of 2009.

Vermilion will pay US$100 million to Marathon on closing of the transaction. An additional payment, depending on the date of first commercial gas from the field, will range from US$300 million to US$135 million. Currently, first gas is expected by the end of 2011. Vermilion would also assume a US$300 million share of capital expenditures to complete the development.

The deal structure, with a deferred payment, will help Vermilion mitigate some of the risks associated with first gas timing.

The Corrib field is expected to produce gross volumes over of 300 MMcf/d of natural gas for a period of two to four years before experiencing natural declines of 20 percent. Net production to Vermilion is initially anticipated at approximately 9,000 BOE/d. As of Jan. 1, net reserves attributable to Vermilion from the Corrib field have been estimated by the Trust’s independent reserve engineers at 17.5 million BOE although Vermilion believes that future development and/or production performance could increase reserves up to 35 million BOE, according to internally prepared estimates of the ultimate potential.

The Corrib field, which is estimated to contain around 1 Tcf of natural gas in place, lies in 350 meters (1,148 ft) of water off Ireland’s northwest coast. The field will initially produce from five subsea wells, which have been completed and are being tied into a subsea template. The well will be tied into an onshore gas treatment facility that is currently under construction. Shell is the operator of the Corrib development with a 45 percent interest. StatoilHydro has a 36.5 percent interest.

The offshore pipeline for the development is being installed this summer. The onshore pipeline has permits pending and could be completed by the fall of 2010. The processing facilities are 75 percent complete and could be ready for start-up in the spring of 2010.

The primary market for natural gas from Corrib is expected to be Ireland itself. BGE Supply will purchase gas from Corrib, with the project providing up to 60 percent of Ireland’s gas at its peak production levels.

There are several other prospects on the exploration license that could further extend the life of the assets if successfully drilled and completed. The Corrib North prospect is being considered for drilling in 2010 after recently obtaining partner approval. The cost to drill the prospect would be around US$10 million per well, net to Vermilion, providing upside opportunity at a relatively low cost.

Vermilion President and CEO Lorenzo Donado said that project is a very different one for the company, as it is non-operated, in early pre-production stages and is the largest transaction in Vermilion’s history. He added that Vermilion is a strong believer in the European natural gas markets and believes Ireland will be a new area of expansion for the company.

Donado called Ireland’s fiscal regime one of the best in the world, and the best in Vermilion’s portfolio. The company was also attracted to the project due to Shell’s presence as an experienced operator.

The Corrib project, particularly the onshore pipeline and facilities, has faced heavy opposition from local groups concerned with safety and environmental risks of the project. Donado told EnergyCurrent that this opposition was “always a concern” to the company and Vermilion had looked into Shell’s handling of the project with great detail. Donado concluded that Shell was doing what it could to address concerns, and he was confident that the project would move forward. He also added that the Irish government was very supportive of the project because of its potential to bring employment to the area.

Vermilion Vice President of Capital Markets Paul Beique told EnergyCurrent that Corrib was a good entry point into the market for Vermilion, especially as the company was entering at the front-end of the project rather than coming in later, and was thus able to reap the full benefits of the development.

Beique said that Vermilion was comfortable with Shell as the operator, as the project was beyond Vermilion’s capacity to operate. However, Corrib could be looked at as a “baby step” or learning experience towards future projects for the trust.

As a result of this agreement and the previous sale of subsidiary Marathon Oil Ireland Ltd., Marathon’s Irish oil and gas exploration and production business will be reported as a discontinued operation in its consolidated financial statements.

Additionally, an after-tax loss on the sale of Marathon International Petroleum Hibernia Ltd., currently estimated at US$150 million, will be reported in the second quarter of 2009. The estimated loss could be adjusted in future periods primarily because a portion of the sales proceeds are contingent on the timing of first commercial gas.

According to Beique, Vermilion was involved in original talks for assets of Marathon Oil Ireland, which was sold to Petronas in April.

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