?Geologist Annell R. Bay joined Marathon Oil Corp. in June 2008 as senior vice president, worldwide exploration. In her new role, she oversees the global potential that the Houston company already has, and is looking to build for the future. The company has assets or operations in 10 countries, including Canada, Libya, Angola, Equatorial Guinea and Norway.

Last year, Marathon added 110 million barrels of oil equivalent of proved reserves worldwide. Its exploration efforts paid off with announcements of its deepwater Gunflint discovery in Mississippi Canyon Block 948 in the Gulf of Mexico, and its 27th and 28th deepwater finds offshore Angola. In addition, it picked up 15 more central Gulf blocks, and added a second exploration block offshore Indonesia.

The company’s 2009 E&P budget is $2.5 billion, with $523 million allocated to global exploration. It plans to participate in eight exploration and 39 exploitation wells in 2009.

Closer to home, it has about 50,000 net acres in Oklahoma’s Woodford shale in the northeastern Anadarko Basin, part of Bay’s exploration portfolio. Recently Marathon announced the world’s first interventionless completion there, in Canadian County, using technology developed by Marathon, BJ Services, GeoDynamics and Expro Group.

Bay joined Marathon after having been vice president, Americas exploration, at Shell Exploration & Production Co. since 2004. Before that, she was vice president, worldwide exploration, in Houston, and vice president, North America exploration, in Denver, for Kerr-McGee Oil & Gas Corp., before it was acquired by Anadarko Petroleum in 2005.

She began her career in New Orleans, in 1980, as an exploration geologist for Shell Oil Co., armed with a bachelor’s degree in geology from Trinity University in San Antonio and a master’s in geology from the University of Texas at Austin.

Today, she is on the board of the National Ocean Industries Association (NOIA), a trustee of the American Geological Institute Foundation, an advisory council member of the Jackson School of Geology at the UT-Austin Geology Foundation, and an advisory committee member of the Bureau of Economic Geology at UT. She spoke with Oil and Gas Investor about Marathon’s exploration philosophy and its plans for 2009 and beyond.

Investor: What percentage of your exploration budget for 2009 is devoted to North America?

Bay: We have a 60/40 split, so it’s a little bit more North America than international. That ratio has not changed much over time. It is more opportunity-based.

Investor: How do you view the prospectivity of the U.S. versus international?

Bay: I’d have to say the U.S. is more prospective right now, in terms of our exploration portfolio, because of our recent drilling success and participation in the recent Gulf lease sale. We have built an inventory of opportunities in the Gulf, and we plan to start drilling in 2010 when we have a new-build rig coming in. The Gulf wells we will participate in this year are all outside-operated. Beyond 2009, we have opportunities to operate, but some will be operated by our peers. This year, we’re working on projects we’ve been planning for the past 18 months. We are targeting primarily the Miocene play, but we also have a Paleogene or Lower Tertiary plan. For example, we participated in Anadarko’s recent Shenandoah discovery well.

Investor: You were awarded 15 blocks last year. What is the focus there?

Bay: We have both Miocene and Paleogene prospects, but the majority is Miocene. Immediate activity is preparation for what will be a ramp-up of activity in 2010. When we operate a rig, there is a lot of preparation and subsurface work needed, and we also work with the drilling department, so there is a lot of advance planning. After the ship drills the first well, it moves to a second, so there is a need for lead time in ordering items and many people are involved. 2009 is an important year for us in preparing for the ramp-up—when that rig comes, we want to keep it active. We always ask ourselves, “Are we drilling the right prospect mix?” We’ve planned some flexibility in the schedule to go to different areas of the Miocene play, depending on the results. When there is success in the program, we will have the option to stay on location longer to, maybe, drill a sidetrack well, prior to moving the drillship to another prospect.

Investor: Are these prospects Marathon-generated?

Bay: Everything we invest in we have worked and evaluated beforehand and we have our own analysis of it. We have partnerships to bid on blocks, and then we develop partnerships where a prospect falls on the adjacent block as well, so we go to the MMS (Minerals Management Service) and talk about forming a unit with the other operator to work the project together. Sometimes the other company has a rig and is ready to drill, so it will operate. It’s a trade-off.

Investor: Are these rank wildcats?

Bay: Many of them are, but some are also satellite prospects that could be tied back to a hub or existing production facility. Some of the prospects could be tied back to some third-party infrastructure—we’ll see by the size of the success if they merit a stand-alone facility.

Investor: How deep is the water on these?

Bay: Water depth is 5,000 to 7,000 feet across the area. We do have some acreage in the deepwater Jurassic play in the eastern Gulf, but it is a smaller portion of our inventory and less of a priority (than the Miocene).

Investor: What about your onshore inventory?

Bay: I think we have some great opportunities. Marathon has a history of operating onshore. One key aspect is that our exploration portfolio has a wide range of risk and significant resource potential. It needs to be a diverse portfolio. What I like about the U.S. onshore, particularly the resource plays, is it has lower subsurface risk. The risk is on the commercial side—it’s about the timing, the cost to drill and complete the wells, the size of the recoverable resource and proximity to pipelines and market—versus the international portfolio, which is focused primarily in deep water. Deepwater opportunities require more time and planning, and working with local governments to bring those opportunities online. We have legacy properties in Oklahoma and Texas, primarily in the Anadarko Basin and in the East Texas Basin. We’ve been there for a long time. We also operate in the Bakken, the Piceance Basin and the Powder River, and we recently purchased some Marcellus shale acreage in Pennsylvania and West Virginia.

Investor: So you include the Marcellus in exploration?

Bay: Yes, because it is still early in the play. It’s not exploration in the traditional sense; it is in the unconventional sense. It is sort of like drilling “develocats,” in that we know what we are drilling into and that the gas resource is present, but it still has some commercial risk.

Investor: In the U.S., which project takes the biggest focus in 2009?

Bay: The Gulf projects are a big focus, based on the needed planning and preparation for 2010. But the onshore business is very fast-paced and active. Our activities can change as prices go up and down. We are able to dial up or down our activity as we go forward. We’re even spending a bit more onshore this year than in the Gulf.

Investor: Many E&Ps are coming back to America—to reduce geopolitical risk, or partly to pursue these unconventional resources such as the shales.

Bay: I think we’ve had a fairly steady spend between domestic and international. In 2009, it is a 60/40 spend, but it has been closer to 50/50 in recent years. We have had great focus and success in Angola and, in the past few years, we did a lot of work in preparation for the Gulf lease sales. I see a real focus for us in the Gulf in the next few years. But we are always looking for new opportunities around the world.

Investor: In light of low commodity prices, you have scaled back.

Bay: Yes, but that’s why it’s nice to be in North America, where we can be flexible. In the Bakken, we reduced our rig count to four, but we’ve been able to significantly improve our drilling efficiency. In the Piceance, we have reduced our activity, which is appropriate. But that allows us to increase activity elsewhere. We have increased our spending in the Woodford. We could operate four or five wells there this year and participate in another three or four.

Investor: Are F&D costs coming down yet?

Bay: Yes, some of the rig costs are coming down. It happens quicker in some places than in others. We can ramp up or down as we need to. We don’t carry a significant pipe inventory—just what is appropriate—so we keep our inventory cost as low as possible.

Investor: What can you tell us about that interventionless completion in the Woodford?

Bay: Compared with conventional completions that use pump-down techniques in horizontal wells, this technique reduced man-hours 35% and costs 10%. We’ll continue to use this.

Investor: What is your focus internationally?

Bay: Right now, we are focused on Indonesia. The Pasangkayu Block is more than 1 million acres. We have a rig arriving in 2010 and we will spud the first of four wells on that block. As I said earlier, it takes a lot of preparation to have a successful drilling campaign. It’s a big opportunity; we have a 70% working interest and will operate. The resource potential could be quite significant to the company. This could be a mix of oil and gas—we have frontier terms on the block—but it’s an unknown. Also, we will participate in outside-operated wells in Block 31 in Angola. And, we’ll be drilling satellite opportunities in Norway’s North Sea near Alvheim.

Investor: What are the plans in Libya?

Bay: We hold 16% outside-operated interest in the Waha concession, about 13 million acres altogether. I oversee the exploration work we are doing there. It’s a good piece of business for us. This year, we’ll be drilling some wells but, like everyone else, the operator is looking at reducing drilling from its original plans. We don’t know the final number of wells just yet.