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Marathon Oil Acquiring Western Oil Sands for $6.2 Billion

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With the acquisition, Marathon gains a 20% stake in the Athabasca Oil Sands Project (AOSP). Click to enlarge.

Marathon Oil Corporation, the largest refiner in the US Midwest, is acquiring Canadian oil sands company Western Oil Sands, Inc. in a transaction valued at C$6.5 billion (US$6.2 billion). Under the terms of the agreement, Western shareholders will receive C$3.8 billion (US$3.6 billion) in cash and 34.3 million shares of Marathon common stock and securities exchangeable for Marathon common stock.

With the acquisition, Marathon picks up a 20% interest in the Athabasca Oil Sands Project (AOSP), which includes the operating Muskeg River Mine and the Scotford Upgrader. The company will gain immediate net production of approximately 31,000 barrels per day (bpd) of bitumen, increasing to more than 130,000 bpd of bitumen by 2020.

Marathon will also assume Western’s debt at closing, which as of 30 June was approximately C$700 million (US$650 million). Contingent upon Western shareholder approval and applicable regulatory approvals, the transaction is anticipated to close early in the fourth quarter of 2007.

The acquisition agreement requires Western to spin-off WesternZagros, its wholly-owned subsidiary with interests in Kurdistan, prior to closing.

Western Oil Sands has net proved mining reserves of 436 million barrels of bitumen, with a total net resource of approximately 2.6 billion barrels of combined mined bitumen and in-situ recovery.

The Athabasca Oil Sands Project is truly a world-class asset with multi-billion barrel, long-life resource potential. Marathon’s strategically advantaged US Midwest downstream business is well positioned to provide both near and long-term solutions to maximize the value of these substantial bitumen resources. We are joining an ongoing and expanding project with strong partners, and collectively, we will be able to apply our technical and commercial skills to maximize both the recovery and value of these resources.

—Clarence P. Cazalot, Jr., president and CEO of Marathon

The AOSP Joint Venture also includes Shell Canada (operator, 60%) and Chevron Canada (20%). The oil sands mining operation encompasses the Muskeg River Mine, located north of Fort McMurray, Alberta, and the Scotford Upgrader, located near Edmonton, Alberta.

Marathon also will take ownership in both operated and non-operated in-situ leases. The Company will gain a 60% interest and operatorship in a 26,000 gross acre project along with a 20% working interest in 75,000 gross acres in the Chevron-operated Ells River project. Collectively, these in-situ leases will add an estimated 600 million barrels of net resource.

Bitumen production from the Muskeg River Mine is taken by pipeline to the Scotford Upgrader which uses hydro-conversion technology to upgrade this bitumen into a range of high-quality, synthetic crude oils without the production of high-carbon coke as a byproduct.

Two-thirds of the bitumen production, together with acquired feedstocks and blendstocks, is upgraded into Premium Albian Synthetic and Albian Heavy Synthetic crudes and marketed directly to refineries in North America. The remaining production is converted into Vacuum Gas Oil and sold under a long-term supply agreement.

Premium Albian Synthetic (PAS) is a 34 degree API sweet blend of hydrotreated Light Carbon (LC) Finer and virgin streams. It is characterized by low sulfur, a high distillate yield and the absence of vacuum residue. The absence of vacuum residue in PAS enables refiners to produce light products without residual fuel oil.

Heavy synthetic crude is a blend of premium Albian synthetic sweet components with LC Finer bottoms. It has a gravity of 20 degree API with a sulfur content of approximately 2.5%.

The Scotford Upgrader will be expanded to handle increased bitumen production through Expansion 1. Each of the Joint Venture Owners is currently working on its own upgrading solution for volumes produced from additional expansions.

A key attribute of this acquisition for Marathon is the ability to link the oil sands production from the AOSP developments with Heavy Oil Upgrade Projects at its refineries. Progress continues on the previously announced front-end engineering and design (FEED) study at Marathon’s Detroit refinery where the Company expects to increase the crude unit capacity to approximately 115,000 bpd, and construct a 28,000 bpd heavy oil coker and other associated process units.

Marathon estimates the capital costs to refine an incremental 80,000 bpd of heavy sour crude at the Detroit refinery will be less than half the investment needed to build an equivalent capacity upgrader in Alberta. Marathon continues to evaluate the potential for similar heavy oil processing projects at its St. Paul Park, Minn., Robinson, Ill., and Garyville, La. refineries.

Scotford Upgrader 2. Separately, Shell filed a regulatory application for Scotford Upgrader 2, a new upgrading facility adjacent to Shell’s existing facilities.

The proposed Scotford Upgrader 2 will be constructed in four phases and process Shell’s share of future Athabasca minable bitumen production as well as bitumen from the company’s in situ oil sands developments.

Scotford Upgrader 2 could ultimately process up to 400,000 barrels a day of oil sands bitumen into a range of synthetic crude oil products.

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