Marathon Oil (MRO)

Acquisition of Western Oil Sands Inc.

On October 18, 2007, we completed the acquisition of all the outstanding shares of Western for cash and securities of $5.833 billion. Western’s debt was $1.063 billion at closing. Western’s primary asset was a 20 percent outside-operated interest in the AOSP, which is located in the province of Alberta, Canada. The acquisition was accounted for under the purchase method of accounting and, as such, our results of operations include Western’s results from October 18, 2007. Western’s oil sands mining and bitumen upgrading operations are reported as a separate Oil Sands Mining segment, while its ownership interests in leases where in-situ recovery techniques are expected to be utilized are included in the Exploration and Production segment.

Acquisition of Western Oil Sands Inc.

On October 18, 2007, we completed the acquisition of all the outstanding shares of Western for cash and securities of
$5.833 billion. Western’s debt was $1.063 billion at closing. Western’s primary asset was a 20 percent outside-operated interest in the AOSP, which is located in the province of Alberta, Canada. The acquisition was accounted for under the
purchase method of accounting and, as such, our results of operations include Western’s results from October 18, 2007. Western’s oil sands mining and bitumen upgrading operations are reported as a separate Oil Sands Mining segment,
while its ownership interests in leases where in-situ recovery techniques are expected to be utilized are included in the Exploration and Production segment.

FACE="Times New Roman" SIZE="2">Exploration and Production

Exploration and Production segment revenues correlate with
prevailing prices for the various qualities of crude oil and natural gas we produce. Higher crude oil prices in 2007 primarily reflected increasing global demand and ongoing concerns about supplies of crude oil from oil-producing countries. During
2007, the average spot price per barrel for West Texas Intermediate (“WTI”), a benchmark crude oil, was $72.41, up from an average of $66.25 in 2006, and ended the year at $95.98. During 2007, the average spot price per barrel for Dated
Brent (“Brent”), an international benchmark crude oil, was $72.39, up from an average of $65.14 in 2006, and ended the year at $96.02. The differential between WTI and Brent average prices narrowed to $0.02 in 2007 from $1.11 in 2006. Our
domestic crude oil production is on average heavier and higher in sulfur content than light sweet WTI. Heavier and higher sulfur crude oil (commonly referred to as heavy sour crude oil) sells at a discount to light sweet crude oil. Our international
crude oil production is relatively sweet and is generally sold in relation to the Brent crude oil benchmark.

Natural gas prices were lower
in 2007 than in 2006. A significant portion of our U.S. lower 48 states natural gas production is sold at bid-week prices or first-of-month indices relative to our specific producing areas. The average Henry Hub first-of-month price index was $0.38
per thousand cubic feet (“mcf”) lower in 2007 than the 2006 average. Our natural gas prices in Alaska are largely contractual. Natural gas sales there are seasonal in nature, trending down during the second and third quarters of each year
and increasing during the fourth and first

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Index to Financial Statements

quarters. Our other major natural gas-producing regions are Europe and Equatorial Guinea, where large portions of our natural gas are sold at contractual
prices, making realized prices in these areas less volatile. The significant increase in sales of natural gas in Equatorial Guinea, at a fixed price, to the new LNG production facility discussed below contributed to the decrease in our average
international realized natural gas prices.

For information on commodity price risk management, see Quantitative and Qualitative
Disclosures about Market Risk.

E&P segment income during 2007 was down 14 percent from 2006, primarily as a result of lower liquid
hydrocarbon sales volumes and natural gas realizations and increased exploration expenses, partially offset by higher liquid hydrocarbon realizations and natural gas sales volumes.

FACE="Times New Roman" SIZE="2">Oil Sands Mining

Our oil sands mining and bitumen upgrading operations were acquired in
October 2007 as part of our acquisition of Western and are comprised of a 20 percent outside-operated interest in the AOSP, which includes the operating Muskeg River mine and the Scotford upgrader, located in Alberta, Canada. The bitumen production
from the Muskeg River mine is taken by pipeline to the Scotford upgrader, which uses hydro-conversion technology to upgrade the bitumen into a range of high-quality, synthetic crude oils. When the AOSP is operating at current capacity, our net
bitumen production is 30 mbpd, but operations were curtailed at the Scotford upgrader subsequent to the Western acquisition date due to a mid-November fire. Maintenance work originally scheduled for the first quarter of 2008 was performed in
conjunction with the necessary repairs. The Scotford upgrader returned to operation in late December.

Oil Sands Mining segment revenues
correlate with prevailing prices for the various qualities of synthetic crude oil we produce and the cost of materials and supplies input during the upgrading process also correlate with market prices for commodities. The operating cost structure of
the oil sands mining operations is predominantly fixed, and therefore many of the costs incurred when the AOSP is in full operation continue during any production downtime. This had a negative effect on segment income subsequent to the acquisition
date as a result of the downtime associated with the fire and maintenance activities discussed above.

For information on commodity price
risk management, see Quantitative and Qualitative Disclosures about Market Risk.