Marathon Oil (MRO)

Pensions and Other Postretirement Benefit Obligations

        Accounting for pension and other postretirement benefit obligations involves numerous assumptions, the most significant of which relate to the following:

•

the discount rate for measuring the present value of future plan obligations;



•

the expected long-term return on plan assets;



•

the rate of future increases in compensation levels; and



•

health care cost projections.

        We develop our demographics and utilize the work of third-party actuaries to assist in the measurement of these obligations. We have selected different discount rates for our funded U.S. pension plans and our unfunded U.S. retiree health plans due to the different projected liability durations of 9 years and 13 years. In determining the assumed discount rates, our methods include a review of market yields on high-quality corporate debt and use of our third-party actuary's discount rate modeling tool. This tool applies a yield curve to the projected benefit plan cash flows

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using a hypothetical Aa yield curve. The yield curve represents a series of annualized individual discount rates from 1.5 to 30 years. The bonds used are rated Aa or higher by a recognized rating agency and only non-callable bonds are included. Each issue is required to have at least $150 million par value outstanding. The top quartile bonds are selected within each maturity group to construct the yield curve.

        The asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 75 percent equity securities and 25 percent debt securities for the funded pension plans), past performance and other factors. Certain components of the asset mix are modeled with various assumptions regarding inflation, debt returns and stock yields. Our assumptions are compared to those of peer companies and to historical returns for reasonableness and appropriateness.

        Compensation increase assumptions are based on historical experience, anticipated future management actions and demographics of the benefit plans.

        Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.

        Note 24 to the consolidated financial statements includes detailed information about the assumptions used to calculate the components of our defined benefit pension and other postretirement plan expense for 2006, 2005 and 2004, as well as the obligations and accumulated other comprehensive income reported on the balance sheets as of December 31, 2006 and 2005.

        Of the assumptions used to measure the December 31, 2006 obligations and estimated 2007 net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit cost reported for the plans. A 0.25 percent decrease in the discount rates of 5.80 percent for our U.S. pension plans and 5.90 percent for our other U.S. postretirement benefit plans would increase pension obligations and other postretirement benefit plan obligations by $93 million and $28 million and would increase defined benefit pension expense and other postretirement plan expense by $13 million and $2 million.

        In 2006, we made certain plan design changes which included an update of the mortality table used in the plans' definition of actuarial equivalence and lump sum calculations and a 20 percent retiree cost of living adjustment for annuitants. This change increased our benefit obligations by $117 million. In 2005, we decreased our retirement age assumption by two years and also increased our lump sum election rate from 90 percent to 96 percent based on changing trends in our experience. This change increased our benefit obligations by $109 million.

Pensions and Other Postretirement Benefit Obligations

        Accounting for pension and other postretirement benefit obligations involves numerous assumptions, the most significant of which relate to the following:

•

the discount rate for measuring the present value of future plan obligations;



•

the expected long-term return on plan assets;



•

the rate of future increases in compensation levels; and



•

health care cost projections.

        We develop our demographics and utilize the work of third-party actuaries to assist in the measurement of these obligations. We have selected different discount rates for our funded U.S. pension plans and our unfunded U.S. retiree health plans due to the different projected liability durations of 9 years and 13 years. In determining the assumed discount rates, our methods include a review of market yields on high-quality corporate debt and use of our third-party actuary's discount rate modeling tool. This tool applies a yield curve to the projected benefit plan cash flows using a hypothetical Aa yield curve. The yield curve represents a series of annualized individual discount rates from 1.5 to 30 years. The bonds used are rated Aa or higher by a recognized rating agency and only non-callable bonds are included. Each issue is required to have at least $150 million par value outstanding. The top quartile bonds are selected within each maturity group to construct the yield curve.

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        The asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 75 percent equity securities and 25 percent debt securities for the funded pension plans), past performance and other factors. Certain components of the asset mix are modeled with various assumptions regarding inflation, debt returns and stock yields. Our assumptions are compared to those of peer companies and to historical returns for reasonableness and appropriateness.

        Compensation increase assumptions are based on historical experience, anticipated future management actions and demographics of the benefit plans.

        Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.

        Note 24 to the consolidated financial statements includes detailed information about the assumptions used to calculate the components of our defined benefit pension and other postretirement plan expense for 2006, 2005 and 2004, as well as the obligations and accumulated other comprehensive income reported on the balance sheets as of December 31, 2006 and 2005.

        Of the assumptions used to measure the December 31, 2006 obligations and estimated 2007 net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit cost reported for the plans. A 0.25 percent decrease in the discount rates of 5.80 percent for our U.S. pension plans and 5.90 percent for our other U.S. postretirement benefit plans would increase pension obligations and other postretirement benefit plan obligations by $93 million and $28 million and would increase defined benefit pension expense and other postretirement plan expense by $13 million and $2 million.

        In 2006, we made certain plan design changes which included an update of the mortality table used in the plans' definition of actuarial equivalence and lump sum calculations and a 20 percent retiree cost of living adjustment for annuitants. This change increased our benefit obligations by $117 million. In 2005, we decreased our retirement age assumption by two years and also increased our lump sum election rate from 90 percent to 96 percent based on changing trends in our experience. This change increased our benefit obligations by $109 million.

Pensions and Other Postretirement Benefit Obligations

        Accounting for pension and other postretirement benefit obligations involves assumptions related to:

•

discount rate for measuring the present value of future plan obligations



•

expected long-term rates of return on plan assets



•

rate of future increases in compensation levels



•

health care cost projections

        We develop our demographics and utilize the work of outside actuaries to assist in the measurement of these obligations. In determining the discount rate, we review market yields on high-quality corporate debt and perform an in-depth analysis of projected pension plan cash flows relating to the duration of pension plan liabilities.

        The asset rate of return assumption considers the asset mix of the plans (currently targeted at approximately 75 percent equity securities and 25 percent debt securities), past performance and other factors. Certain components of the asset mix are modeled with various assumptions regarding inflation, debt returns and stock yields. Peer data and historical returns are reviewed to check for reasonableness.

        Compensation increase assumptions are based on historical experience, anticipated future management actions and demographics of the benefit plans.

        Health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends.

        Note 23 to the Consolidated Financial Statements, beginning on page F-30, includes detailed information for the three years ended December 31, 2004, on the components of pension and other postretirement expense and the underlying assumptions as well as the funded status for the company's pension plans for the years ended 2004 and 2003.

        Of the assumptions used to measure the December 31, 2004 obligations and estimated 2005 net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit costs reported for the plans. A .25 percent decrease in the discount rate of 5.75 percent for domestic and 5.30 percent for international would increase pension and other postretirement plan expense by approximately $13 million and $2 million, respectively.