Marathon Oil (MRO)

Exploration

In the United States during 2008, we drilled 71 gross (48 net) exploratory wells of which 60 gross (42 net) wells encountered commercial quantities of hydrocarbons. Of these 60 wells, 3 were temporarily suspended or in the process of being completed at year end. Internationally, we drilled 12 gross (3 net) exploratory wells of which 11 gross (3 net) wells encountered commercial quantities of hydrocarbons. Of these 11 wells, 5 gross (1 net) wells were temporarily suspended or were in the process of being completed at December 31, 2008.

United States – The Gulf of Mexico continues to be a core area. At the end of 2008, we had interests in 103 blocks in the Gulf of Mexico, including 97 in the deepwater area. We have been awarded 42 blocks on which we were the high bidder in the federal Outer Continental Shelf Lease Sales No. 205 and 206 conducted by the U.S. Minerals Management Service (“MMS”) in late 2007 and early 2008. Our initial net investment in these blocks was $343 million. We own 100 percent of fifteen of the blocks. We acquired the remaining blocks in conjunction with partners. Our plans call for initial drilling on some of these leases in 2009 and 2010.

In 2008, a successful appraisal well was drilled on the Stones prospect located on Walker Ridge Block 508 after a 2005 discovery. We hold a 25 percent outside-operated interest in the Stones prospect. In the third quarter of 2008, we announced a Gulf of Mexico deepwater discovery on the Gunflint prospect located on Mississippi Canyon Block 948. We own a 13 percent outside-operated interest in the prospect. In the first quarter of 2009, we participated in a deepwater discovery on the Shenandoah prospect located on Walker Ridge Block 52. We own a 20 percent outside-operated interest in the prospect.

In 2008, we successfully completed our first horizontal well in the Woodford Shale resource play in the Anadarko Basin of Oklahoma. We are currently participating in additional horizontal wells in the area where we hold 30,000 net acres.

We hold acreage in two additional emerging shale resource plays in the U.S. In the Appalachian Basin we hold 65,000 net acres in the Marcellus Shale resource play in Pennsylvania and West Virginia. We hold 25,000 net acres, primarily in Texas, in the Haynesville Shale resource play located in north Louisiana and east Texas. Initial drilling on some of these leases is planned for 2009.

Angola – Offshore Angola, we hold a 10 percent outside-operated interest in Block 31 and a 30 percent outside-operated interest in Block 32. Through December 2008, 28 discoveries on these blocks have been announced, including the Portia and Dione discoveries on Angola Block 31 in 2008.

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Index to Financial Statements

Norway – We hold interests in over 510,000 gross acres offshore Norway, including production license 505 (“PL 505”) that was awarded in January 2009. In 2009, exploration drilling is expected to commence on additional prospects with the potential to be tied back to the Alvheim complex.

Indonesia – We are the operator and hold a 70 percent interest in the Pasangkayu Block offshore Indonesia. The 1.2 million acre block is located mostly in deep water, predominantly offshore of the island of Sulawesi in the Makassar Strait, directly east of the Kutei Basin production region. The production sharing contract with the Indonesian government was signed in 2006 and we completed 3D seismic acquisition in May 2008. We expect to begin exploratory drilling in early 2010. Additionally, in October 2008, we were granted a 49 percent interest and operatorship in the Bone Bay Block offshore Indonesia. The Bone Bay Block is 200 miles southeast of our Pasangkayu Block. Current exploration plans for Bone Bay call for the acquisition of seismic data starting in 2010, followed by drilling in 2011.

We are the operator of a drilling rig consortium that has secured a two-year contract for a deepwater exploration drilling rig. The rig will be used for deepwater exploration activities by us and by five other companies in Indonesia. The participants have the right to extend this rig commitment.

We continue to participate in joint study agreements in Indonesia, which provide a right of first refusal in future bid rounds. We completed two joint study agreements in 2008.

Equatorial Guinea – During 2004, we announced the Deep Luba and Gardenia discoveries on the Alba Block, in which we hold a 63 percent operated interest, and the Corona well on Block D, where we are the operator with a 90 percent interest. These wells are part of our long-term LNG strategy. We expect these discoveries to be developed when the natural gas supply from the nearby Alba Field starts to decline.

Libya – We hold a 16 percent outside-operated interest in the Waha concessions, which encompass almost 13 million acres located in the Sirte Basin. Our exploration program in 2008 included the drilling of three wells, all of which were successful. Most of these discoveries extended previously defined hydrocarbon accumulations.

Canada – We hold interests in both operated and outside-operated exploration-stage in-situ oil sand leases as a result of the acquisition of Western in 2007. Initial test drilling on the 100 percent interest Birchwood prospect positively confirmed bitumen presence with additional test drilling required to confirm reservoir quality.

United Kingdom – We have a 45 percent interest in five exploratory U.K. onshore coal seam gas (“CSG”) licenses. Drilling has been completed in five exploration wells in three of the licenses. One test well was completed in 2007 and three lateral wells for production testing were drilled in 2008. We and our partners were awarded 11 new blocks for CSG exploration and potential future development during the 13th Onshore Licensing Round in 2008. After the 2008 licensing our interest covers 520,000 acres. We are the operator of these new licenses and have a 55 percent working interest.

Exploration

In the United States during 2008, we drilled 71 gross (48 net) exploratory wells of which 60 gross (42 net) wells encountered commercial quantities of hydrocarbons. Of these 60 wells, 3 were temporarily suspended or in the process of being completed at year end. Internationally, we drilled 12 gross (3 net) exploratory wells of which 11 gross (3 net) wells encountered commercial quantities of hydrocarbons. Of these 11 wells, 5 gross (1 net) wells were temporarily suspended or were in the process of being completed at December 31, 2008.

United States – The Gulf of Mexico continues to be a core area. At the end of 2008, we had interests in 103 blocks in the Gulf of Mexico, including 97 in the deepwater area. We have been awarded 42 blocks on which we were the high bidder in the federal Outer Continental Shelf Lease Sales No. 205 and 206 conducted by the U.S. Minerals Management Service (“MMS”) in late 2007 and early 2008. Our initial net investment in these blocks was $343 million. We own 100 percent of fifteen of the blocks. We acquired the remaining blocks in conjunction with partners. Our plans call for initial drilling on some of these leases in 2009 and 2010.

In 2008, a successful appraisal well was drilled on the Stones prospect located on Walker Ridge Block 508 after a 2005 discovery. We hold a 25 percent outside-operated interest in the Stones prospect. In the third quarter of 2008, we announced a Gulf of Mexico deepwater discovery on the Gunflint prospect located on Mississippi Canyon Block 948. We own a 13 percent outside-operated interest in the prospect. In the first quarter of 2009, we participated in a deepwater discovery on the Shenandoah prospect located on Walker Ridge Block 52. We own a 20 percent outside-operated interest in the prospect.

In 2008, we successfully completed our first horizontal well in the Woodford Shale resource play in the Anadarko Basin of Oklahoma. We are currently participating in additional horizontal wells in the area where we hold 30,000 net acres.

We hold acreage in two additional emerging shale resource plays in the U.S. In the Appalachian Basin we hold 65,000 net acres in the Marcellus Shale resource play in Pennsylvania and West Virginia. We hold 25,000 net acres, primarily in Texas, in the Haynesville Shale resource play located in north Louisiana and east Texas. Initial drilling on some of these leases is planned for 2009.

Angola – Offshore Angola, we hold a 10 percent outside-operated interest in Block 31 and a 30 percent outside-operated interest in Block 32. Through December 2008, 28 discoveries on these blocks have been announced, including the Portia and Dione discoveries on Angola Block 31 in 2008.

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Table of Contents

Index to Financial Statements

Norway – We hold interests in over 510,000 gross acres offshore Norway, including production license 505 (“PL 505”) that was awarded in January 2009. In 2009, exploration drilling is expected to commence on additional prospects with the potential to be tied back to the Alvheim complex.

Indonesia – We are the operator and hold a 70 percent interest in the Pasangkayu Block offshore Indonesia. The 1.2 million acre block is located mostly in deep water, predominantly offshore of the island of Sulawesi in the Makassar Strait, directly east of the Kutei Basin production region. The production sharing contract with the Indonesian government was signed in 2006 and we completed 3D seismic acquisition in May 2008. We expect to begin exploratory drilling in early 2010. Additionally, in October 2008, we were granted a 49 percent interest and operatorship in the Bone Bay Block offshore Indonesia. The Bone Bay Block is 200 miles southeast of our Pasangkayu Block. Current exploration plans for Bone Bay call for the acquisition of seismic data starting in 2010, followed by drilling in 2011.

We are the operator of a drilling rig consortium that has secured a two-year contract for a deepwater exploration drilling rig. The rig will be used for deepwater exploration activities by us and by five other companies in Indonesia. The participants have the right to extend this rig commitment.

We continue to participate in joint study agreements in Indonesia, which provide a right of first refusal in future bid rounds. We completed two joint study agreements in 2008.

Equatorial Guinea – During 2004, we announced the Deep Luba and Gardenia discoveries on the Alba Block, in which we hold a 63 percent operated interest, and the Corona well on Block D, where we are the operator with a 90 percent interest. These wells are part of our long-term LNG strategy. We expect these discoveries to be developed when the natural gas supply from the nearby Alba Field starts to decline.

Libya – We hold a 16 percent outside-operated interest in the Waha concessions, which encompass almost 13 million acres located in the Sirte Basin. Our exploration program in 2008 included the drilling of three wells, all of which were successful. Most of these discoveries extended previously defined hydrocarbon accumulations.

Canada – We hold interests in both operated and outside-operated exploration-stage in-situ oil sand leases as a result of the acquisition of Western in 2007. Initial test drilling on the 100 percent interest Birchwood prospect positively confirmed bitumen presence with additional test drilling required to confirm reservoir quality.

United Kingdom – We have a 45 percent interest in five exploratory U.K. onshore coal seam gas (“CSG”) licenses. Drilling has been completed in five exploration wells in three of the licenses. One test well was completed in 2007 and three lateral wells for production testing were drilled in 2008. We and our partners were awarded 11 new blocks for CSG exploration and potential future development during the 13th Onshore Licensing Round in 2008. After the 2008 licensing our interest covers 520,000 acres. We are the operator of these new licenses and have a 55 percent working interest.

Exploration

Major exploration activities are currently underway or under evaluation worldwide.

Angola – We hold a 10 percent outside-operated interest in offshore Block 31 and a 30 percent outside-operated interest in offshore Block 32. We plan to participate in four to six exploration or appraisal wells in these deepwater blocks in 2009. Four potential development hubs have been identified on these two blocks and we continue to evaluate our discoveries for future development.

Norway – We hold interests in over 510,000 acres offshore Norway and plan to continue our exploration efforts there. In 2009, exploration drilling is expected to commence on additional prospects with the potential to be tied back to the Alvheim complex.

Gulf of Mexico – We plan to participate in one to three exploration wells during 2009. The exploration success on the Shenandoah prospect was announced in February 2009 by the operator. We own a 10 percent outside-operated interest in this prospect. Additional prospects have been identified in the Gulf of Mexico deepwater leases acquired in 2007 and 2008. These projects make up the core of our 2009 through 2010 Gulf of Mexico exploration drilling plans.

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Index to Financial Statements

Indonesia – We continue to evaluate seismic data on the Pasangkayu Block offshore Indonesia and plan to start exploratory drilling there in early 2010. We are the operator of this block and hold a 70 percent interest. Evaluation of the Bone Bay Block offshore Indonesia, which we were awarded in 2008, continues with plans to collect seismic data in 2010. Exploratory drilling on this block could begin in 2011. We have a 49 percent interest in the Bone Bay Block and are the operator.

U.S. onshore – We announced a discovery in the Woodford Shale in January 2009. We hold 30,000 net acres in the Woodford Shale resource play in the Anadarko Basin of Oklahoma and plan to participate in more horizontal wells in 2009. We also hold prospective acreage in two emerging shale resource plays in the U.S. In the Appalachian Basin we hold 65,000 net acres in the Marcellus Shale resource play in Pennsylvania and West Virginia. We also hold 25,000 net acres, primarily in Texas, in the Haynesville Shale resource play in North Louisiana and East Texas . Our plans call for initial drilling on some of these leases in 2009.

Equatorial Guinea – We are evaluating development scenarios for the Deep Luba and Gardenia discoveries on the Alba Block, one of which includes production through the Alba field infrastructure. We own a 63 percent interest in the Alba Block and serve as operator.

Exploration

Major exploration activities are currently underway or under evaluation worldwide.

Angola – We hold a 10 percent outside-operated interest in offshore Block 31 and a 30 percent outside-operated interest in offshore Block 32. We plan to participate in four to six exploration or appraisal wells in these deepwater blocks in 2009. Four potential development hubs have been identified on these two blocks and we continue to evaluate our discoveries for future development.

Norway – We hold interests in over 510,000 acres offshore Norway and plan to continue our exploration efforts there. In 2009, exploration drilling is expected to commence on additional prospects with the potential to be tied back to the Alvheim complex.

Gulf of Mexico – We plan to participate in one to three exploration wells during 2009. The exploration success on the Shenandoah prospect was announced in February 2009 by the operator. We own a 10 percent outside-operated interest in this prospect. Additional prospects have been identified in the Gulf of Mexico deepwater leases acquired in 2007 and 2008. These projects make up the core of our 2009 through 2010 Gulf of Mexico exploration drilling plans.

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Index to Financial Statements

Indonesia – We continue to evaluate seismic data on the Pasangkayu Block offshore Indonesia and plan to start exploratory drilling there in early 2010. We are the operator of this block and hold a 70 percent interest. Evaluation of the Bone Bay Block offshore Indonesia, which we were awarded in 2008, continues with plans to collect seismic data in 2010. Exploratory drilling on this block could begin in 2011. We have a 49 percent interest in the Bone Bay Block and are the operator.

U.S. onshore – We announced a discovery in the Woodford Shale in January 2009. We hold 30,000 net acres in the Woodford Shale resource play in the Anadarko Basin of Oklahoma and plan to participate in more horizontal wells in 2009. We also hold prospective acreage in two emerging shale resource plays in the U.S. In the Appalachian Basin we hold 65,000 net acres in the Marcellus Shale resource play in Pennsylvania and West Virginia. We also hold 25,000 net acres, primarily in Texas, in the Haynesville Shale resource play in North Louisiana and East Texas . Our plans call for initial drilling on some of these leases in 2009.

Equatorial Guinea – We are evaluating development scenarios for the Deep Luba and Gardenia discoveries on the Alba Block, one of which includes production through the Alba field infrastructure. We own a 63 percent interest in the Alba Block and serve as operator.

Exploration

In the United States during 2007, we drilled 59 gross (39 net) exploratory wells of which 47 gross (29 net) wells encountered commercial quantities of hydrocarbons. Of these 47 wells, none were temporarily suspended or in the process of being completed at year end. Internationally, we drilled 25 gross (6 net) exploratory wells of which 16 gross (4 net) wells encountered commercial quantities of hydrocarbons. Of these 16 wells, 10 gross (3 net) wells were temporarily suspended or were in the process of being completed at December 31, 2007.

United States – The Gulf of Mexico continues to be a core area for us. At the end of 2007, we had interests in 71 blocks in the Gulf of Mexico, including 64 in the deepwater area. In October 2007, we were the high bidder on 27 blocks offered in the federal Outer Continental Shelf Lease Sale No. 205 conducted by the U.S. Minerals Management Service (“MMS”) and were awarded these leases in early 2008. Representing a total net investment of $222 million for us, 13 blocks were bid 100 percent by us, and the remaining 14 blocks were bid in conjunction with partners. Our plans call for initial drilling on some of these leases in 2009 or 2010. The contract for the rig has an initial term of two years with an option to extend for an additional two years.

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Table of Contents

Index to Financial Statements

In 2007, we drilled the Droshky (previously named Troika Deep) deepwater discovery well. This well and two appraisal sidetrack wells are located on Green Canyon Block 244 in the Gulf of Mexico and we are in the process of drilling additional appraisal wells. We have secured an additional year of drilling rig capacity in 2009 for development drilling in anticipation of a 2008 project sanction. The timing of initial production from the Droshky discovery will be dependent upon delivery of key equipment and regulatory approvals, but could be as early as 2010. We hold a 100 percent working interest in the Drohsky discovery.

In late 2007, drilling of an appraisal well began on the Stones prospect (Walker Ridge Block 508) after a 2005 discovery. We hold a 30 percent outside-operated interest in the Stones prospect.

In 2001, a successful discovery well was drilled on the Ozona prospect (Garden Banks Block 515) in the Gulf of Mexico and, in 2002, two sidetrack wells were drilled. We are continuing to evaluate options to develop the Ozona prospect. Commercial terms have been secured for the tie-back and processing of Ozona production and we have been actively searching for a rig to drill the development well. We hold a 68 percent operated interest in the Ozona prospect.

Angola – Offshore Angola, we hold a 10 percent outside-operated interest in Block 31 and a 30 percent outside-operated interest in Block 32. Through February 2008, 27 discoveries on these blocks have been announced, including eight in 2007 and one in early 2008. These discoveries represent four potential development hubs. Four discoveries and one successful appraisal well form a planned development area in the northeastern portion of Block 31. Nine other discoveries on Block 31 comprise potential development areas in the southeast and middle portions of the block. Seven of the Block 32 discoveries form our first potential development in the eastern area of that block.

Norway – We hold interests in over 800,000 gross acres offshore Norway and plan to continue our exploration effort there. We hold a 28 percent outside-operated interest in the Gudrun field, located 120 miles off the coast of Norway, where we are focused on subsurface evaluation and assessing development concepts after a successful appraisal well in 2006. First production from Gudrun is expected in 2012. In 2007, we also continued to advance exploration opportunities in the Alvheim area, the first of which is expected to be drilled in 2009.

Indonesia – We are the operator and hold a 70 percent interest in the Pasangkayu Block offshore Indonesia. The 1.2 million acre block is located mostly in deep water, predominantly offshore of the island of Sulawesi in the Makassar Strait, directly east of the Kutei Basin production region. The production sharing contract with the Indonesian government was signed in 2006 and we will begin collecting geophysical data in the first quarter of 2008. We expect to begin exploratory drilling in 2009.

In addition, we were awarded two study agreements and farmed into additional study agreements in Indonesia in 2007 which could lead to the acquisition of new leaseholds at a future lease sale.

Equatorial Guinea – During 2004, we announced the Deep Luba and Gardenia discoveries on the Alba Block, in which we hold a 63 percent operated interest, and the Corona well on Block D, where we are the operator with a 90 percent interest. These wells are part of our long-term LNG strategy. We expect these discoveries to be developed when the natural gas supply from the nearby Alba Field starts to decline or additional LNG markets are entered that require increased natural gas supply.

Libya – We hold a 16 percent outside-operated interest in the Waha concessions, which encompass almost 13 million acres located in the Sirte Basin. Our exploration program in 2007 included the drilling of eight wells, six of which were successful. Most of these discoveries extended previously defined hydrocarbon accumulations.

Canada – We hold interests in both operated and outside-operated exploration-stage in-situ oil sand leases as a result of the acquisition of Western in 2007.

United Kingdom – During 2007, we acquired a 45 percent outside-operated interest in three exploratory onshore coal bed methane licenses in the United Kingdom, representing 128,000 gross acres. Three exploration wells have been drilled on two of the licenses and additional delineation and production testing is planned during 2008. We also plan to participate in the U.K. Onshore Licensing Round during 2008 to secure additional acreage.

In the U.K. portion of the North Sea, Marathon participated in a discovery in Block 204/23 adjacent to the Foinaven field. This Foinaven Southwest discovery encountered hydrocarbons and will be considered for a potential tieback to the nearby infrastructure.

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Table of Contents

Index to Financial Statements

Ukraine – In 2007, we signed a cooperation agreement with a Ukrainian partner to carry out a study in the Dneiper-Donets Basin in north central Ukraine. The joint study will be conducted over three years on an area of joint interest covering 10,000 square miles and could lead to the joint exploration for hydrocarbons.

Exploration

        In the United States during 2006, we drilled 33 gross (16 net) exploratory wells of which 21 gross (10 net) wells encountered commercial quantities of hydrocarbons. Of these 21 wells, 6 gross (4 net) wells were temporarily suspended or were in the process of completing at year end. Internationally, we drilled 21 gross (4 net) exploratory wells of which 16 gross (3 net) wells encountered commercial quantities of hydrocarbons. Of these 16 wells, 9 gross (3 net) wells were temporarily suspended or were in the process of being completed at December 31, 2006.

        United States  –  The Gulf of Mexico continues to be a core area for us. At the end of 2006, we had interests in 129 blocks in the Gulf of Mexico, including 100 in the deepwater area.

        During 2006, we increased our interest from 20 percent to 30 percent in the Stones prospect (Walker Ridge Block 508). An appraisal well is planned for 2007 on this outside-operated 2005 discovery.

        In 2001, a successful discovery well was drilled on the Ozona prospect (Garden Banks Block 515) in the Gulf of Mexico and, in 2002, two sidetrack wells were drilled, one of which was successful. We are continuing to evaluate options to develop the Ozona prospect. Commercial terms have been secured for the tie-back and processing of Ozona production and we have been actively searching for a rig to drill the development well. We hold a 68 percent operated interest in the Ozona prospect.

        A well on the Flathead prospect (Walker Ridge Block 30) in the Gulf of Mexico was suspended in 2002. Technical evaluations are complete and commercial evaluations continued in 2006. The drilling of this prospect is delayed due to the shortage of available deepwater rigs. We continue to pursue partnering opportunities with other oil and gas companies that have deepwater rigs under contract. We hold a 100 percent operated interest in the Flathead prospect.

        Norway  –  We hold interests in over 700,000 gross acres offshore Norway and plan to continue our exploration effort there. In 2006, we participated in a successful appraisal well on the Gudrun field, located 120 miles off the coast. Marathon holds a 28 percent outside-operated interest in Gudrun where we are primarily focused on evaluating development scenarios.

        Angola  –  Offshore Angola, we hold a 10 percent outside-operated interest in Block 31 and a 30 percent outside-operated interest in Block 32. Through February 2007, we have announced 20 discoveries on these blocks. We have

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also participated in four wells that have reached total depth, the results of which will be announced upon government and partner approvals. We expect to participate in 10 or 11 wells on these blocks in 2007.

        On Block 31, four previously announced discoveries (Plutao, Saturno, Marte and Venus) and one successful appraisal well form a planned development area in the northeastern portion of the block. Also on Block 31, we had five previously announced discoveries located in the southeastern portion of the block (Palas, Ceres, Juno, Astraea and Hebe). In 2006 and early 2007, we announced discoveries at Urano, Titania, Terra and an unnamed well. We are integrating the results of these wells with our previously announced discoveries.

        On Block 32, we previously announced three discoveries (Gindungo, Canela and Gengibre). In 2006, we announced the fourth discovery on Block 32, the Mostarda-1, and a successful deepwater delineation well, Gengibre-2. We also announced that hydrocarbons were encountered in the Salsa well, but additional drilling is required to assess its commerciality. In early 2007, we announced two additional discoveries, the Manjericao and Caril wells. These discoveries move Block 32 closer toward establishment of a commercial development.

        Equatorial Guinea  –  During 2004, we participated in two natural gas and condensate discoveries on the Alba Block offshore Equatorial Guinea. The Deep Luba discovery well, drilled from the Alba field production platform, encountered natural gas and condensate in several pay zones. The Gardenia discovery well is located 11 miles southwest of the Alba Field. We are currently evaluating development scenarios for both the Deep Luba and Gardenia discoveries. We hold a 63 percent operated interest in the Alba Block.

        In 2004, we announced the results of the Corona well drilled on Block D offshore Equatorial Guinea, where we are the operator with a 90 percent working interest. The Corona well confirmed an extension of the Alba field on to Block D. An application for an Area of Commercial Discovery was submitted prior to the end of the production sharing contract's exploration period, which expired at the end of 2006. We are currently in discussions with the Equatorial Guinea government regarding our rights to develop the Block D extension of the Alba Field.

        Libya  –  We hold a 16 percent outside-operated interest in the Waha concessions, which encompass almost 13 million acres located in the Sirte Basin. Our exploration program in 2006 included the drilling of 12 wells, nine of which were successful. Most of these discoveries extended previously defined hydrocarbon accumulations.

        Canada  –  We are the operator and own a 30 percent interest in the Annapolis lease offshore Nova Scotia, where we continue to evaluate further drilling. In late 2006, we decided to withdraw from the adjacent Cortland lease, where we hold a 75 percent interest, and the adjacent Empire lease, where we hold a 50 percent interest. As a result of this withdrawal, a charge equal to 25 percent of the remaining work commitment, or $47 million, was recorded as exploration expense in 2006 and the cash payment will be due to the Canadian provincial government in 2007.

        Indonesia  –  We are the operator and hold a 70 percent interest in the Pasangkayu Block offshore Indonesia. The 1.2 million acre block is located mostly in deep water, predominantly offshore of the island of Sulawesi in the Makassar Strait, directly east of the Kutei Basin oil and natural gas production region. The production sharing contract with the Indonesian government was signed in 2006. We expect to begin collecting geophysical data in 2007, followed by exploratory drilling in 2008 and 2009.

Exploration

        In the United States during 2004, we drilled 35 gross (17 net) exploratory wells of which 22 gross (10 net) wells encountered hydrocarbons. Of these 22 wells, 3 gross (1 net) wells were temporarily suspended or are in the process of completing. Internationally, we drilled 21 gross (16 net) exploratory wells of which 13 gross (10 net) wells encountered hydrocarbons. Of these 13 wells, 13 gross (9 net) wells were temporarily suspended or are in the process of completing.

        United States  –  The Gulf of Mexico continues to be a core area for us with the potential to add new reserves. At the end of 2004, we had interests in 123 blocks in the Gulf of Mexico, including 94 in the deepwater area.

        During 2004, we announced that the Neptune 7 appraisal well on the Neptune Unit in the Gulf of Mexico encountered hydrocarbons. This discovery follows the Neptune 3 discovery in 2002 and the Neptune 5 discovery in 2003. Two successful appraisal sidetrack wells also were drilled from the original Neptune 5 location. Front end engineering and design for a Neptune development is currently underway. We hold a 30 percent interest in the Neptune Unit.

        Announced in 2003, the Perseus discovery is located on Viosca Knoll Block 830 in the Gulf of Mexico approximately five miles from the existing Petronius platform. The Perseus discovery was expected to begin production in 2004 via an extended-reach well drilled from the Petronius platform. Due to hurricane activity in September 2004 and the resulting damage to the Petronius platform, production from Perseus has been delayed until repairs of the Petronius platform can be completed. We hold a 50 percent interest in the Perseus discovery.

        In 2001 a successful discovery well was drilled on the Ozona prospect in the Gulf of Mexico and in 2002 two sidetrack wells were drilled, one of which was successful. We have established an integrated project team to formulate a development plan. We are currently negotiating commercial terms of a production handling agreement with a nearby operator. We are also in the process of reviewing seismic data to obtain a better understanding of the complex salt formations in the area and to optimize the location of the next well. We hold a 68 percent interest in the Ozona prospect.

        Other United States exploration activity during 2004 included three wells in the Cook Inlet area of Alaska, two of which were discoveries, and 11 wells in the Anadarko Basin in Oklahoma, nine of which were discoveries.

        Norway  –  During 2004 we announced the Hamsun discovery. The well is located on production license (PL) 150, which is approximately 136 miles from Stavanger, Norway, and approximately six miles south of the Alvheim area. The discovery well and three sidetracks encountered oil and gas. Results are being analyzed and development scenarios are being examined including a possible tie-back to the Alvheim development. We are the operator of PL150, owning a 65 percent interest. The Hamsun well builds on our successful 2003 Norwegian drilling program, which resulted in three discoveries, the Kneler and Boa discoveries in the Alvheim development and the Vilje (formerly known as Klegg) discovery. In December 2004 we acquired four new Norwegian exploration licenses, three of which we are designated as operator.

        Angola  –  Offshore Angola, we own a 10 percent interest in Block 31 and a 30 percent interest in Block 32. During 2004, we participated in the Venus-1 well, the fourth oil discovery on Block 31. The Venus well is located near the

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Plutao, Saturno and Marte discoveries in the northeast portion of Block 31. These discoveries are the basis for a planned development of the northeast area of Block 31. Development options are currently being evaluated.

        During late 2004, we participated in a well on the Palas prospect in the southern portion of Block 31, and in early 2005, it was announced as a discovery. Also, at the end of 2004, operations were ongoing at the Ceres prospect, located in the central portion of Block 31.

        During 2004, we announced the Canela discovery on Block 32, located about 10 miles south of the 2003 Gindungo discovery. Also in 2004, wells on the Cola and Gengibre prospects, both on Block 32, reached total depth. The Cola well encountered hydrocarbons, but additional drilling will be required to determine commerciality. The results of the Gengibre well will be announced following government approval.

        Equatorial Guinea  –  During 2004, we participated in two natural gas and condensate discoveries on the Alba Block offshore Equatorial Guinea. The Deep Luba discovery well, drilled from the Alba field production platform, encountered gas and condensate in several pay zones. The Gardenia discovery well is located approximately 11 miles southwest of the Alba Field. We are currently evaluating development scenarios for both the Deep Luba and Gardenia discoveries. These discoveries reinforce the potential of the Alba Block, in which we own a 63 percent interest.

        In 2003, we announced a natural gas discovery on Block D offshore Equatorial Guinea, where we are the operator with a 90 percent interest. The discovery well is on the Bococo prospect, which is approximately six miles west of the Alba field. The well has been suspended for reentry at a later date. Development scenarios for the Bococo gas discovery along with three earlier dry gas discoveries on Block D are being considered for further development.

        Canada  –  In 2002, we announced a gas discovery at the Annapolis G-24 deepwater wildcat well approximately 215 miles south of Halifax, Nova Scotia in 5,504 feet of water. The G-24 encountered gas pay over several zones. The Crimson well, six miles southeast of the Annapolis discovery, was drilled in 2004 and was plugged and abandoned. We are the operator and own a 30 percent interest in the Annapolis lease. In addition, we operate the adjacent Cortland lease where we own a 75 interest and the adjacent Empire lease where we own a 50 percent interest.