Deposition of ferruginous sediment was widespread during the Archaean and Proterozoic Eons, playing an important role in global biogeochemical cycling. Knowledge of organic matter mineralization in such sediment, however, remains mostly conceptual, as modern ferruginous analogs are largely unstudied. Here we show that in sediment of ferruginous Lake Towuti, Indonesia, methanogenesis dominates organic matter mineralization despite highly abundant reactive ferric iron phases like goethite that persist throughout the sediment. Ferric iron can thus be buried over geologic timescales even in the presence of labile organic carbon. Coexistence of ferric iron with millimolar concentrations of methane further demonstrates lack of iron-dependent methane oxidation. With negligible methane oxidation, methane diffuses from the sediment into overlying waters where it can be oxidized with oxygen or escape to the atmosphere. In low-oxygen ferruginous Archaean and Proterozoic oceans, therefore, sedimentary methane production was likely favored with strong potential to influence Earth's early climate.