Marathon Oil (MRO)

Integrated Gas

Our integrated gas operations include natural gas liquefaction and regasification operations and methanol production operations. Also included in the financial results of the Integrated Gas segment are the costs associated with ongoing development of projects to link stranded natural gas resources with key demand areas.

Integrated Gas

Our integrated gas operations include natural gas liquefaction and regasification operations and methanol production operations. Also included in the financial results of the Integrated Gas segment are the costs associated with ongoing development of projects to link stranded natural gas resources with key demand areas.

Integrated Gas

Our integrated gas strategy is to link stranded natural gas resources with areas where a supply gap is emerging due to declining production and growing demand. Our integrated gas operations include marketing and transportation of products manufactured from natural gas, such as LNG and methanol, primarily in the U.S., Europe and West Africa.

Our most significant LNG investment is our 60 percent ownership in a production facility in Equatorial Guinea, which sells LNG under a long-term contract at prices tied to Henry Hub natural gas prices. In 2008, its

41

Table of Contents

Index to Financial Statements

first full year of operations, the plant sold 3.4 million metric tonnes. Our share of sales was 2.1 million tonnes. Industry estimates of 2008 LNG trade are approximately 175 million metric tonnes, which is about 25 percent of international natural gas trade. More LNG production facilities and tankers are being constructed. The recent worldwide economic downturn is expected to lower natural gas consumption in various countries; therefore, affecting near-term demand for LNG. Long-term LNG supply continues to be in demand as markets seek the benefits of clean burning natural gas. Market prices for LNG are not reported or posted. In general, LNG delivered to the U.S. is tied to Henry Hub prices and will track with changes in U.S. natural gas prices, while LNG sold in Europe and Asia is indexed to crude oil prices and will track the movement of those prices.

We own a 45 percent interest in a methanol plant located in Equatorial Guinea through our investment in AMPCO. Sales of methanol from the plant totaled 792,794 metric tonnes in 2008. Methanol demand has a direct impact on AMPCO’s earnings. Because global demand for methanol is rather limited, changes in the supply-demand balance can have a significant impact on sales prices. The 2008 Chemical Markets Associates, Inc.’s World Methanol Analysis predicts demand for methanol in 2009 will be 43 million metric tonnes. Our plant capacity is 1.1 million, or 3 percent of total demand. Also included in the financial results of the Integrated Gas segment are costs associated with ongoing development of integrated gas projects, including natural gas technology research.

Integrated Gas segment income in 2008 was up 129 percent from 2007, primarily because the LNG production facility in Equatorial Guinea, which commenced operations in May 2007, operated for the full year.

Integrated Gas

Our integrated gas strategy is to link stranded natural gas resources with areas where a supply gap is emerging due to declining production and growing demand. Our integrated gas operations include marketing and transportation of products manufactured from natural gas, such as LNG and methanol, primarily in the U.S., Europe and West Africa.

Our most significant LNG investment is our 60 percent ownership in a production facility in Equatorial Guinea, which sells LNG under a long-term contract at prices tied to Henry Hub natural gas prices. In 2008, its

41

Table of Contents

Index to Financial Statements

first full year of operations, the plant sold 3.4 million metric tonnes. Our share of sales was 2.1 million tonnes. Industry estimates of 2008 LNG trade are approximately 175 million metric tonnes, which is about 25 percent of international natural gas trade. More LNG production facilities and tankers are being constructed. The recent worldwide economic downturn is expected to lower natural gas consumption in various countries; therefore, affecting near-term demand for LNG. Long-term LNG supply continues to be in demand as markets seek the benefits of clean burning natural gas. Market prices for LNG are not reported or posted. In general, LNG delivered to the U.S. is tied to Henry Hub prices and will track with changes in U.S. natural gas prices, while LNG sold in Europe and Asia is indexed to crude oil prices and will track the movement of those prices.

We own a 45 percent interest in a methanol plant located in Equatorial Guinea through our investment in AMPCO. Sales of methanol from the plant totaled 792,794 metric tonnes in 2008. Methanol demand has a direct impact on AMPCO’s earnings. Because global demand for methanol is rather limited, changes in the supply-demand balance can have a significant impact on sales prices. The 2008 Chemical Markets Associates, Inc.’s World Methanol Analysis predicts demand for methanol in 2009 will be 43 million metric tonnes. Our plant capacity is 1.1 million, or 3 percent of total demand. Also included in the financial results of the Integrated Gas segment are costs associated with ongoing development of integrated gas projects, including natural gas technology research.

Integrated Gas segment income in 2008 was up 129 percent from 2007, primarily because the LNG production facility in Equatorial Guinea, which commenced operations in May 2007, operated for the full year.

Integrated Gas

Our net worldwide LNG sales volumes are expected to average 5,700 to 6,400 metric tonnes per day in 2009.

We continue to invest in the development of new technologies to supply new energy sources. In 2008, we completed construction of a facility to demonstrate operation of the fully integrated gas-to-fuels process at a practical scale. We are evaluating the commercialization of this technology and have engaged an engineering contractor to provide engineering and design services for using our proprietary GTF™ technology on a commercial scale.

The above discussion contains forward looking statements with respect to future LNG sales and the potential commercialization of our GTF™ technology. Projected LNG sales volumes are based upon a number of assumptions, including unforeseen hazards such as weather conditions, acts of war or terrorist acts and government or military response thereto and other operating and economic considerations. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Integrated Gas

Our net worldwide LNG sales volumes are expected to average 5,700 to 6,400 metric tonnes per day in 2009.

We continue to invest in the development of new technologies to supply new energy sources. In 2008, we completed construction of a facility to demonstrate operation of the fully integrated gas-to-fuels process at a practical scale. We are evaluating the commercialization of this technology and have engaged an engineering contractor to provide engineering and design services for using our proprietary GTF™ technology on a commercial scale.

The above discussion contains forward looking statements with respect to future LNG sales and the potential commercialization of our GTF™ technology. Projected LNG sales volumes are based upon a number of assumptions, including unforeseen hazards such as weather conditions, acts of war or terrorist acts and government or military response thereto and other operating and economic considerations. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Integrated Gas

Our net
worldwide LNG sales volumes are expected to average 5,700 to 6,400 metric tonnes per day in 2009.

We continue to invest in the development
of new technologies to supply new energy sources. In 2008, we completed construction of a facility to demonstrate operation of the fully integrated gas-to-fuels process at a practical scale. We are evaluating the commercialization of this technology
and have engaged an engineering contractor to provide engineering and design services for using our proprietary GTF™ technology on a commercial scale.

FACE="Times New Roman" SIZE="2">The above discussion contains forward looking statements with respect to future LNG sales and the potential commercialization of our GTF™ technology. Projected LNG sales volumes are based upon a number of
assumptions, including unforeseen hazards such as weather conditions, acts of war or terrorist acts and government or military response thereto and other operating and economic considerations. The foregoing factors (among others) could cause actual
results to differ materially from those set forth in the forward-looking statements.

Integrated Gas

Net worldwide LNG sales volumes are expected to average 6,225 to 6,875 metric tonnes per day in 2008. Projected LNG sales volumes are based upon a number of assumptions, including unforeseen hazards such as weather conditions, acts of war or terrorist acts and government or military response thereto, and other operating and economic considerations.

In 2007 we completed those portions of the FEED required to support the near-term efforts related to a potential second LNG production facility on Bioko Island, Equatorial Guinea. The scope of the FEED work for the potential 4.4 mmtpa LNG project included feed gas metering, liquefaction, refrigeration, ethylene storage, boil-off gas compression, product transfer to storage and LNG product metering. We expect to make progress towards an investment decision in 2008.

The above discussion contains forward looking statements with respect to the possible expansion of the LNG production facility which could potentially be affected by partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient re-gasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

60

Table of Contents

Index to Financial Statements

Integrated Gas

Integrated Gas segment income totaled $49 million in the fourth quarter of 2007 and $132 million for the full year 2007, compared to a loss of $7 million and income of $16 million in the comparable periods of 2006. During 2007, construction of the EG LNG Train 1 production facility was completed ahead of schedule and on budget. The increases in segment income over the comparable prior-year periods were largely due to the fact that this facility, in which Marathon holds a 60 percent interest, began operations in May 2007 and delivered 24 cargoes during the year. Following a shut-in for the repair of a minor leak, the LNG production facility returned to normal operations in mid-November and has since produced at 92 percent of the 3.7 million metric tonnes per annum nameplate capacity. Additionally, income from the Company’s equity method investment in Atlantic Methanol Production Company LLC was higher in both the fourth quarter and full year 2007 on increased methanol production and realized prices.

Marathon Oil Corporation Reports Fourth Quarter and Full-Year 2007 Financial Results  page  7

Integrated Gas (“IG”)

The LNG production facility in Equatorial Guinea was completed and delivered its first cargo of LNG in May 2007.  As scheduled, the production facility was shutdown in June 2007 for a performance test which confirmed the facility’s capacity of 3.7 million metric tonnes per annum and again in July for commissioning maintenance.  The facility returned to production later that month for the remainder of the third quarter and produced LNG at a rate of 93 percent of design capacity for the quarter.  Following the detection of a minor leak, the facility was shut down on October 4, 2007.  Warranty repairs have commenced and LNG production is expected to resume between mid-November and early December 2007.

Once the LNG production facility commenced its primary operations and began to generate revenue in May 2007, EGHoldings was no longer a variable interest entity.  Effective May 1, 2007, we no longer consolidate EGHoldings, despite the fact that we hold majority ownership, because the minority shareholders have rights limiting our ability to

18

Integrated Gas

Integrated gas segment income was $52 million in the third quarter of 2007, compared to a loss of $2 million in the third quarter of 2006. The increase was largely due to the fact that the third quarter of 2007 was the first full quarter of operations for the Train 1 LNG production facility in Equatorial Guinea. In addition, income from the Company’s equity method investment in Atlantic Methanol Production Company LLC (AMPCO) increased relative to the third quarter of 2006 when the plant was idle for a portion of that quarter.

The Train 1 LNG production facility in Equatorial Guinea, in which Marathon holds a 60 percent interest, delivered its first cargo on May 24, 2007, and produced LNG at a rate of 93 percent of design capacity during the third quarter. Following the detection of a minor isolated leak, the facility was shut down on Oct. 4, 2007. Warranty repairs have commenced and LNG production is expected to resume between mid-November and early December 2007.

Marathon continues to invest in the development of new technologies to create value and supply new energy sources. The Company expended approximately $12 million on a pretax basis during the third quarter of 2007 on gas commercialization technologies, including the construction of a demonstration plant to further develop its proprietary Gas-To-Fuels^TM technology.

Integrated Gas ("IG")

        Our significant integrated gas activities during the first quarter of 2007 related to the LNG production facility in Equatorial Guinea. Commissioning of the facility continues and the first shipments of LNG are expected in the second quarter of 2007. We own a 60 percent interest in EGHoldings.

        Once the LNG production facility commences its principal operations and begins to generate revenue, EGHoldings will no longer be a variable interest entity ("VIE"). We consolidate EGHoldings because it is a VIE and we are its primary beneficiary. When it ceases to be a VIE we will no longer consolidate EGHoldings, despite the fact that we hold majority ownership, because the minority shareholders have rights limiting our ability to exercise control over the entity. When EGHoldings ceases to be a VIE, which is expected in the second quarter of 2007, we will account for our interest using the equity method of accounting.

2

        Together with our project partners, we have completed those portions of the front-end engineering and design for a potential second LNG production facility on Bioko Island, Equatorial Guinea that are required to support the near-term efforts for this project. We expect a final investment decision in 2008.

        The above discussion contains forward-looking statements with respect to the timing of production associated with the LNG facility in Equatorial Guinea and the possible expansion thereof. Factors that could affect the LNG production facility include unforeseen problems arising from commissioning of the facilities, unforeseen hazards such as weather conditions and other operating considerations such as shipping the LNG. In addition to these factors, other factors that could potentially affect the possible expansion of the current LNG production facility and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Corporate

        On April 25, 2007, our Board of Directors declared a two-for-one split of our common stock. The stock split was effected in the form of a stock dividend distributed on June 18, 2007, to stockholders of record at the close of business on May 23, 2007. Stockholders received one additional share of our common stock for each share of common stock held as of the close of business on the record date. Common stock and per share (except par value) information for all periods presented has been restated throughout this document to reflect the stock split.

Integrated Gas

        Construction of the LNG production facility in Equatorial Guinea continues ahead of its original schedule with the first shipments of LNG projected for the second quarter of 2007. Construction is nearly complete and commissioning has commenced. We own a 60 percent interest in Equatorial Guinea LNG Holdings Limited. We are currently seeking additional natural gas supplies to allow full utilization of this LNG facility, which is designed to have a higher capacity and a longer life than the current contract to supply 3.4 million metric tons per year for 17 years.

        Once the Equatorial Guinea LNG production facility commences its principal operations and begins to generate revenue, we must assess whether or not EGHoldings continues to be a variable interest entity ("VIE"). We consolidate EGHoldings because it is a VIE and we are its primary beneficiary. Despite the fact that we hold majority ownership, we would not consolidate EGHoldings if it ceased to be a VIE because the minority shareholders have substantive participating rights. If EGHoldings ceased to be a VIE, we would account for our interest using the equity method of accounting.

        In 2006, with our project partners, we awarded a FEED contract for initial work related to a potential second LNG production facility on Bioko Island, Equatorial Guinea. The FEED work is expected to be completed during 2007. The scope of the FEED work for the potential 4.4 million metric tones per annum LNG facility includes feed gas metering, liquefaction, refrigeration, ethylene storage, boil off gas compression, product transfer to storage and LNG product metering. A final investment decision is expected in early 2008.

        Atlantic Methanol Production Company LLC underwent a scheduled maintenance shutdown in 2006, during which bottlenecks in several parts of the plant were also removed. Deliveries resumed in October 2006 and AMPCO expects to reach its full expansion capacity during 2007.

        The above discussion contains forward looking statements with respect to the timing and levels of production associated with the LNG production facility and the possible expansion thereof. Factors that could affect the LNG production facility include unforeseen problems arising from commissioning of the facilities, unforeseen hazards such as weather conditions and other operating considerations such as shipping the LNG. In addition to these factors, other factors that could potentially affect the possible expansion of the current LNG production facility and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

22

Accounting Standards Not Yet Adopted

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It requires that unrealized gains and losses on items for which the fair value option has been elected be recorded in net income. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. For us, SFAS No. 159 will be effective January 1, 2008, and retrospective application is not permitted. Should we elect to apply the fair value option to any eligible items that exist at January 1, 2008, the effect of the first remeasurement to fair value would be reported as a cumulative effect adjustment to the opening balance of retained earnings. We are currently evaluating the provisions of this statement.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements but may require some entities to change their measurement practices. For us, SFAS No. 157 will be effective January 1, 2008, with early application permitted. We are currently evaluating the provisions of this statement.

        In September 2006, the FASB issued FASB Staff Position ("FSP") No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities." This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. We expense such costs in the same annual period as incurred; however, estimated annual major maintenance costs are recognized as expense throughout the year on a pro rata basis. As such, adoption of FSP No. AUG AIR-1 will have no impact on our annual consolidated financial statements. We are required to adopt the FSP effective January 1, 2007. We do not believe the provisions of FSP No. AUG AIR-1 will have a significant impact on our interim consolidated financial statements.

        In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109." FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, transition and disclosure. For us, the provisions of FIN No. 48 are effective January 1, 2007. We do not believe adoption of this statement will have a significant effect on our consolidated results of operations, financial position or cash flows.

        In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets – An Amendment of FASB Statement No. 140." This statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. We are required to adopt SFAS No. 156 effective January 1, 2007. We do not expect adoption of this statement to have a significant effect on our consolidated results of operations, financial position or cash flows.

        In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments – An Amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the interim FASB guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. For us, SFAS No. 155 is effective for all financial instruments acquired or issued on or after January 1, 2007. We do not expect adoption of this statement to have a significant effect on our consolidated results of operations, financial position or cash flows.

23

QuickLinks

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
2006 Operating Highlights
Critical Accounting Estimates
Management's Discussion and Analysis of Results of Operations
E&P Operating Statistics

RM&T Operating Statistics
Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity

Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies
Outlook
Accounting Standards Not Yet Adopted

Integrated Gas (“IG”)

The LNG production facility in Equatorial Guinea was completed and delivered its first cargo of LNG in May 2007.  A total of three cargos were delivered during the second quarter of 2007.  As scheduled, the production facility was shutdown in June 2007 for a performance test which confirmed the facility’s capacity of 3.7 million metric tonnes per annum.  The facility was shut down again in July for commissioning maintenance and has since returned its processing levels to full capacity.

Once the LNG production facility commenced its primary operations and began to generate revenue in May 2007, EGHoldings was no longer a variable interest entity.  Effective May 1, 2007, we no longer consolidate EGHoldings, despite the fact that we hold majority ownership, because the minority shareholders have rights limiting our ability to exercise control over the entity.   Our investment in EGHoldings is accounted for prospectively using the equity method of accounting.

Together with our project partners, we have completed those portions of the front-end engineering and design for a potential second LNG production facility on Bioko Island, Equatorial Guinea that are required to support the near-term efforts for this project.  We expect a final investment decision in 2008.

The above discussion contains forward-looking statements with respect to the possible expansion of the LNG production facility.  Factors that could potentially affect the possible expansion of the facility and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity.  The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Integrated Gas (“IG”)

Our significant integrated gas activities during the first quarter of 2007 related to the LNG production facility in Equatorial Guinea. Commissioning of the facility continues and the first shipments of LNG are expected in the second quarter of 2007. We own a 60 percent interest in EGHoldings.

Once the LNG production facility commences its principal operations and begins to generate revenue, EGHoldings will no longer be a variable interest entity (“VIE”). We consolidate EGHoldings because it is a VIE and we are its primary beneficiary. When it ceases to be a VIE we will no longer consolidate EGHoldings, despite the fact that we hold majority ownership, because the minority shareholders have rights limiting our ability to exercise control over the entity. When EGHoldings ceases to be a VIE, which is expected in the second quarter of 2007, we will account for our interest using the equity method of accounting.

13

Together with our project partners, we have completed those portions of the front-end engineering and design for a potential second LNG production facility on Bioko Island, Equatorial Guinea that are required to support the near-term efforts for this project. We expect a final investment decision in 2008.

The above discussion contains forward-looking statements with respect to the timing of production associated with the LNG facility in Equatorial Guinea and the possible expansion thereof. Factors that could affect the LNG production facility include unforeseen problems arising from commissioning of the facilities, unforeseen hazards such as weather conditions and other operating considerations such as shipping the LNG. In addition to these factors, other factors that could potentially affect the possible expansion of the current LNG production facility and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Corporate

On April 25, 2007, our Board of Directors declared a two-for-one split of our common stock. The stock split will be effected in the form of a stock dividend to be distributed on June 18, 2007, to stockholders of record at the close of business on May 23, 2007. Stockholders will receive one additional share of our common stock for each share of common stock held as of the close of business on the record date. See Note 13 to the accompanying condensed consolidated financial statements for proforma information reflecting the impact of the stock split on income per share for the first quarters of 2007 and 2006.

Integrated Gas

        Construction of the LNG production facility in Equatorial Guinea continues ahead of its original schedule with the first shipments of LNG projected for the second quarter of 2007. Construction is nearly complete and commissioning has commenced. We own a 60 percent interest in Equatorial Guinea LNG Holdings Limited. We are currently seeking additional natural gas supplies to allow full utilization of this LNG facility, which is designed to have a higher capacity and a longer life than the current contract to supply 3.4 million metric tons per year for 17 years.

        Once the Equatorial Guinea LNG production facility commences its principal operations and begins to generate revenue, we must assess whether or not EGHoldings continues to be a variable interest entity ("VIE"). We consolidate EGHoldings because it is a VIE and we are its primary beneficiary. Despite the fact that we hold majority ownership, we would not consolidate EGHoldings if it ceased to be a VIE because the minority shareholders have substantive participating rights. If EGHoldings ceased to be a VIE, we would account for our interest using the equity method of accounting.

        In 2006, with our project partners, we awarded a FEED contract for initial work related to a potential second LNG production facility on Bioko Island, Equatorial Guinea. The FEED work is expected to be completed during 2007. The scope of the FEED work for the potential 4.4 million metric tones per annum LNG facility includes feed gas metering, liquefaction, refrigeration, ethylene storage, boil off gas compression, product transfer to storage and LNG product metering. A final investment decision is expected in early 2008.

        Atlantic Methanol Production Company LLC underwent a scheduled maintenance shutdown in 2006, during which bottlenecks in several parts of the plant were also removed. Deliveries resumed in October 2006 and AMPCO expects to reach its full expansion capacity during 2007.

        The above discussion contains forward looking statements with respect to the timing and levels of production associated with the LNG production facility and the possible expansion thereof. Factors that could affect the LNG production facility include unforeseen problems arising from commissioning of the facilities, unforeseen hazards such as weather conditions and other operating considerations such as shipping the LNG. In addition to these factors, other factors that could potentially affect the possible expansion of the current LNG production facility and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient natural gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

54

Accounting Standards Not Yet Adopted

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It requires that unrealized gains and losses on items for which the fair value option has been elected be recorded in net income. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. For us, SFAS No. 159 will be effective January 1, 2008, and retrospective application is not permitted. Should we elect to apply the fair value option to any eligible items that exist at January 1, 2008, the effect of the first remeasurement to fair value would be reported as a cumulative effect adjustment to the opening balance of retained earnings. We are currently evaluating the provisions of this statement.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements but may require some entities to change their measurement practices. For us, SFAS No. 157 will be effective January 1, 2008, with early application permitted. We are currently evaluating the provisions of this statement.

        In September 2006, the FASB issued FASB Staff Position ("FSP") No. AUG AIR-1, "Accounting for Planned Major Maintenance Activities." This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. We expense such costs in the same annual period as incurred; however, estimated annual major maintenance costs are recognized as expense throughout the year on a pro rata basis. As such, adoption of FSP No. AUG AIR-1 will have no impact on our annual consolidated financial statements. We are required to adopt the FSP effective January 1, 2007. We do not believe the provisions of FSP No. AUG AIR-1 will have a significant impact on our interim consolidated financial statements.

        In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109." FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, transition and disclosure. For us, the provisions of FIN No. 48 are effective January 1, 2007. We do not believe adoption of this statement will have a significant effect on our consolidated results of operations, financial position or cash flows.

        In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets – An Amendment of FASB Statement No. 140." This statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. We are required to adopt SFAS No. 156 effective January 1, 2007. We do not expect adoption of this statement to have a significant effect on our consolidated results of operations, financial position or cash flows.

        In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments – An Amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the interim FASB guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. For us, SFAS No. 155 is effective for all financial instruments acquired or issued on or after January 1, 2007. We do not expect adoption of this statement to have a significant effect on our consolidated results of operations, financial position or cash flows.

55

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Management Opinion Concerning Derivative Instruments

        Management has authorized the use of futures, forwards, swaps and combinations of options to manage exposure to market fluctuations in commodity prices, interest rates and foreign currency exchange rates.

        We use commodity-based derivatives to manage price risk related to the purchase, production or sale of crude oil, natural gas and refined products. To a lesser extent, we are exposed to the risk of price fluctuations on natural gas liquids and petroleum feedstocks used as raw materials and on purchases of ethanol.

        Our strategy generally has been to obtain competitive prices for our products and allow operating results to reflect market price movements dictated by supply and demand. We use a variety of derivative instruments, including option combinations, as part of the overall risk management program to manage commodity price risk in our different businesses. As market conditions change, we evaluate our risk management program and could enter into strategies that assume greater market risk.

        Our E&P segment primarily uses commodity derivative instruments selectively to protect against price decreases on portions of our future production when deemed advantageous to do so. We also use derivatives to protect the value of natural gas purchased and injected into storage in support of production operations. We use commodity derivative instruments to mitigate the price risk associated with the purchase and subsequent resale of natural gas on purchased volumes and anticipated sales volumes.

        Our RM&T segment uses commodity derivative instruments:

•

to mitigate the price risk:



•

between the time foreign and domestic crude oil and other feedstock purchases for refinery supply are priced and when they are actually refined into salable petroleum products,



•

on fixed price contracts for ethanol purchases,



•

associated with anticipated natural gas purchases for refinery use, and



•

associated with freight on crude oil, feedstocks and refined product deliveries;



•

to protect the value of excess refined product, crude oil and liquefied petroleum gas inventories;



•

to protect margins associated with future fixed price sales of refined products to non-retail customers;



•

to protect against decreases in future crack spreads; and



•

to take advantage of trading opportunities identified in the commodity markets.

        We use financial derivative instruments to manage foreign currency exchange rate exposure on certain foreign currency denominated capital expenditures, operating expenses and tax payments.

        We use financial derivative instruments to manage certain interest rate risk exposures. As we enter into these derivatives, assessments are made as to the qualification of each transaction for hedge accounting.

        We believe that our use of derivative instruments along with risk assessment procedures and internal controls does not expose us to material risk. However, the use of derivative instruments could materially affect our results of operations in particular quarterly or annual periods. We believe that the use of these instruments will not have a material adverse effect on our consolidated financial position or liquidity.

56

Integrated Gas

Our Equatorial Guinea LNG train 1 project made continued progress during the quarter and remains on-track to begin first shipment of LNG in 2007.  The project was 58 percent complete on an engineering, procurement and construction basis and expenditures totaled $1 billion of the total gross estimated project cost of $1.4 billion as of September 30, 2005. Also, the Equatorial Guinea LNG project partners continue to explore the feasibility of adding a second LNG train in an effort to create a regional gas hub that would commercialize stranded gas from various sources in the surrounding Gulf of Guinea region.

We sold minority interests totaling 15 percent in EGHoldings and recorded a gain of $23 million.  Following the closing of the transaction on July 25, 2005, we now hold a 60 percent interest in this consolidated subsidiary.

The above discussion contains forward-looking statements with respect to the estimated construction cost and startup dates of a LNG liquefaction plant and related facilities and the possible expansion thereof.  Factors that could affect the estimated construction cost and startup dates of the LNG liquefaction plant and related facilities include, without limitation, unforeseen problems arising from construction, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions.  In addition to these factors, other factors that could affect the possible expansion of the current LNG project and the development of additional LNG capacity through additional projects include partner approvals, access to sufficient gas volumes through exploration or commercial negotiations with other resource owners and access to sufficient regasification capacity.  The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

20

The Integrated Gas segment incurred a loss of $6 million in the third quarter of 2005 compared to $18 million income in the third quarter of 2004. The decrease was primarily the result of mark-to-market changes in the fair value of derivatives used to support gas marketing activities.

During the third quarter, the AMPCO methanol plant in Equatorial Guinea realized solid earnings as a result of a 100 percent on-stream factor and continued strong posted index prices for methanol.

The Equatorial Guinea LNG Train 1 project made continued progress during the quarter and remains on-track to begin first shipments of LNG in 2007.  As of the end of the third quarter, the Train 1 project was approximately 58 percent complete on an engineering, procurement and construction (EPC) basis and gross expenditures totaled approximately $1 billion of the total estimated project cost of $1.4 billion.  Marathon holds a 60 percent interest in Equatorial Guinea LNG Holdings Limited (EG Holdings).  Also, the Equatorial Guinea LNG project partners continue to explore the feasibility of adding a second LNG train in an effort to create a regional gas hub that would commercialize stranded gas from various sources in the surrounding Gulf of Guinea region.

Integrated Gas

During the second quarter of 2005, Marathon and the Government of Equatorial Guinea entered into agreements under which Mitsui & Co., Ltd. (“Mitsui”) and a subsidiary of Marubeni Corporation (“Marubeni”) would acquire interests in the Equatorial Guinea liquefied natural gas (“LNG”) project.  Following the closing of the transaction on July 25, 2005, we now hold a 60 percent interest in the project, with GEPetrol holding a 25 percent interest and Mitsui and Marubeni holding the remaining interests.

Our Equatorial Guinea LNG project made continued progress during the quarter and remains on-track to begin first shipment of LNG in late 2007.  The project was 43 percent complete on an engineering, procurement and construction basis and expenditures totaled $815 million of the total gross estimated project cost of $1.4 billion as of June 30, 2005.

The above discussion contains forward-looking statements with respect to the estimated construction cost and startup dates of a LNG liquefaction plant and related facilities.  Factors that could affect the estimated construction cost and startup dates of the LNG liquefaction plant and related facilities include, without limitation, unforeseen problems arising from construction, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions.  The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

Integrated gas segment income was $11 million in second quarter 2005 compared to a loss of $8 million in second quarter 2004. The increase in the second quarter was primarily the result of higher margins from gas marketing activities, including recognized changes in the fair value of derivatives used to support those activities.  Prior year second quarter results also included $18 million of gross start-up costs associated with the LNG project in Equatorial Guinea.

During the second quarter, the AMPCO methanol plant in Equatorial Guinea operated at a 99 percent on-stream factor and posted index prices for methanol have remained strong averaging nearly $309 per ton during the quarter compared to approximately $250 per ton during the same period last year.

During the second quarter 2005, Marathon and the Government of Equatorial Guinea announced that agreements were entered into under which Mitsui & Co., Ltd. (Mitsui) and a subsidiary of Marubeni Corporation (Marubeni) would acquire 8.5 percent and 6.5 percent interests, respectively, in the Equatorial Guinea LNG project.  Following the closing of the transaction on July 25, Marathon now holds a 60 percent interest in the project, with Compañía Nacional de Petroleos de Guinea Ecuatorial (GEPetrol), the National Oil Company of Equatorial Guinea, holding a 25 percent interest.

The Equatorial Guinea LNG project made continued progress during the quarter and remains on-track to begin first shipments of LNG in late 2007.  As of the end of the second quarter, the project was 43 percent complete on an engineering, procurement and construction (EPC) basis and expenditures totaled approximately $815 million of the total estimated project cost of $1.4 billion.

Integrated Gas

Our integrated gas activities during the quarter were marked by continued progress in constructing our LNG project in Equatorial Guinea.  Project expenditures totaled approximately $675 million as of March 31, 2005.  Construction remains on schedule with first shipments of LNG expected in late 2007.

During the quarter, we took delivery of two cargos of LNG under our long term delivery rights at the Elba Island (Georgia) regasification terminal.  In the second half of 2005, we will begin taking delivery of LNG at Elba Island under terms of a supply agreement reached with BP Energy Company (“BP”) last year under which BP will supply us with 58 billion cubic feet of natural gas per year, as LNG, for a minimum period of five years.

Following the successful demonstration of gas-to-liquids (“GTL”) technology at our Port of Catoosa (Oklahoma) GTL facility last year, we intend to further develop this important technology through an Integrated Technology Project (“ITP”).  The ITP, also at the Port of Catoosa, will combine higher efficiency syngas processing and liquid products treatment with the Syntroleum FT reactor.  This project will build upon last year’s successful demonstration with the objective of producing ultra-clean, low-sulfur fuels from stranded and flared natural gas at a range of economic plant sizes.

We have been advised by Qatar’s Energy Minister that our proposed Qatar GTL project will be delayed.  The principal reason for the delay is Qatar Petroleum’s desire to ensure that they manage the giant North Field gas resources in the most effective manner and they are currently reviewing their long-term gas production delivery plans.  In addition, they are examining the industry’s capacity to manage the design and construction of the large number of gas projects in a compressed time frame in a single location, which we believe to be a reasonable and responsible approach.  Despite this delay, we remain committed to fully exploring the potential of GTL technology.  Additionally, we continue to examine a variety of gas projects to apply our GTL technology package, as well as compressed natural gas and methanol processes which are ready for commercial application.

The above discussion contains forward-looking statements with respect to the estimated construction and startup dates of a LNG liquefaction plant and related facilities.  Factors that could affect the estimated construction and startup dates of the LNG liquefaction plant and related facilities include, without limitation, unforeseen problems arising from construction, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, environmental issues, availability or construction of sufficient LNG vessels, and unforeseen hazards such as weather conditions.  The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.

14

Integrated gas segment income was $7 million in first quarter 2005 compared with $15 million in first quarter 2004. The decrease was due to mark-to-market changes in the value of derivatives used to support gas marketing activities, partially offset by increased earnings from Marathon’s equity investment in the AMPCO methanol plant in Equatorial Guinea.  During the first quarter, the methanol plant operated at a 94 percent on-stream factor and prices have remained strong averaging nearly $260 per ton during the quarter.

Marathon’s integrated gas activities during the quarter were marked by continued progress in constructing the company’s LNG project in Equatorial Guinea.  Project expenditures totaled approximately $675 million as of March 31, 2005.  Construction remains on schedule with first shipments of LNG expected in late 2007.

Also during the quarter, Marathon took delivery of two cargos of LNG under its long term delivery rights at the Elba Island (Georgia) regasification terminal.  In the second half of 2005, the company will begin taking delivery of LNG at Elba Island under terms of a supply agreement reached with BP Energy Company last year under which BP will supply Marathon with 58 billion cubic feet of natural gas per year, as LNG, for a minimum period of five years.

Following the successful demonstration of GTL technology at Marathon’s and Syntroleum Corporation’s Port of Catoosa (Oklahoma) GTL facility last year, Marathon intends to further develop this important technology through an Integrated Technology Project (ITP).  The ITP, also at the Port of Catoosa, will combine higher efficiency syngas processing and liquid products treatment with the Syntroleum FT reactor.    This project will build upon last year’s successful demonstration with the objective of producing ultra-clean, low-sulfur fuels from stranded and flared natural gas at a range of economic plant sizes.

Marathon and its partners have been advised by Qatar’s Energy Minister that the company’s proposed Qatar GTL project will be delayed.  The principal reason for the delay is Qatar Petroleum’s desire to ensure that they manage the giant North Field gas resources in the most effective manner and they are currently reviewing their long-term gas production delivery plans.  In addition, they are examining the industry’s capacity to manage the design and construction of the large number of gas projects in a compressed time frame in a single location, which Marathon believes to be a reasonable and responsible approach.  Despite this delay, Marathon remains committed to fully exploring the potential of GTL technology.  Additionally, the company continues to examine a variety of gas projects to apply the company’s GTL technology package, as well as compressed natural gas and methanol processes which are ready for commercial application.

The company will conduct a conference call today, April 28, 2005, at 2 p.m. EDT during which it will discuss first quarter results, as well as the modified agreement Marathon and Ashland Inc. have reached regarding Marathon’s purchase of Ashland’s interest in MAP announced earlier this morning.  To listen to the Web cast of the conference call, visit the Marathon Web site at www.marathon.com. Replays of the Web cast will be available through May 12, 2005. Quarterly financial and operational information is also provided on Marathon’s Web site at http://www.marathon.com/Investor_Center/Investor_Relations/ in the Quarterly Investor Packet.

- xxx -

In addition to net income determined in accordance with generally accepted accounting principles (GAAP), Marathon has provided supplementally “net income adjusted for special items”, a non-GAAP financial measure which facilitates comparisons to earnings forecasts prepared by stock analysts and other third parties.  Such forecasts generally exclude the effects of items that are difficult to predict or to measure in advance and are

5