Marathon Oil Corporation was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of old USX Corporation. As a result of a reorganization completed in July 2001 (the “Holding Company Reorganization”), USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the transaction discussed in the next paragraph (the “Separation”), USX Corporation changed its name to Marathon Oil Corporation.

Before December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock, which was intended to reflect the performance of Marathon’s energy business, and USX-U.S. Steel Group common stock (“Steel Stock”), which was intended to reflect the performance of Marathon’s steel business. On December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (“United States Steel”) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis.

In connection with the Separation, Marathon’s certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized.

Marathon’s principal operating subsidiaries are Marathon Oil Company and Marathon Ashland Petroleum LLC (“MAP”). Marathon Oil Company and its predecessors have been engaged in the oil and gas business since 1887. MAP is 62-percent owned by Marathon and 38-percent owned by Ashland Inc.

Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through MAP; and other energy related businesses.

Operating Highlights

During 2003, Marathon:

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Segment and Geographic Information

For operating segment and geographic information, see Note 8 to the Consolidated Financial Statements on page F-20.

Exploration and Production

Marathon is currently conducting exploration and development activities in nine countries. Principal exploration activities are in the United States, Norway, Equatorial Guinea, Angola, and Canada. Principal development activities are in the United States, the United Kingdom, Ireland, Norway, Equatorial Guinea, Gabon, and Russia. Marathon is also pursuing opportunities in north and west Africa and the Middle East.

At year-end 2003, Marathon was producing crude oil and/or natural gas in seven countries, including the United States. Marathon’s worldwide liquid hydrocarbon production, including Marathon’s proportionate share of equity investees’ production, decreased six percent from 2002 levels. Marathon’s 2003 worldwide sales of natural gas production, including Marathon’s proportionate share of equity investees’ production and gas acquired for injection and subsequent resale, decreased approximately five percent from 2002. In total, Marathon’s 2003 worldwide production averaged 389,000 barrels of oil equivalent (“BOE”) per day, including discontinued operations and impacts of acquisitions and dispositions, compared to 412,000 BOE per day in 2002. In 2004, Marathon’s worldwide production is expected to average 365,000 BOE per day, excluding acquisitions and dispositions.

The above projection of 2004 worldwide liquid hydrocarbon production and natural gas volumes is a forward-looking statement. Some factors that could potentially affect timing and levels of production include pricing, supply

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and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, production decline rates of mature fields, timing of commencing production from new wells, drilling rig availability, future acquisitions or dispositions of producing properties, unforeseen hazards such as weather conditions, acts of war or terrorist acts and the government or military response thereto, and other geological, operating and economic considerations. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statement.

United States

Including Marathon’s proportionate share of equity investee production, approximately 57 percent of Marathon’s 2003 worldwide liquid hydrocarbon production and 63 percent of its worldwide natural gas production was produced from U.S. operations. Marathon’s ongoing U.S. strategy is to apply its technical expertise in fields with undeveloped potential, to dispose of interests in non-core properties with limited upside potential and high production costs, and to acquire interests in properties with upside potential.

During 2003, Marathon drilled 21 gross (11 net) exploratory wells of which 15 gross (9 net) wells encountered hydrocarbons. Of these 15 wells, 3 gross (2 net) wells were temporarily suspended or are in the process of completing.

Marathon’s principal U.S. exploration, development, and producing areas are located in the Gulf of Mexico and the states of Texas, New Mexico, Alaska, Wyoming, and Oklahoma.

U.S. Southern Business Unit

Gulf of Mexico – During 2003, Marathon’s share of Gulf of Mexico production averaged 53,500 barrels per day (“bpd”) of liquid hydrocarbons, representing 48 percent of Marathon’s total U.S. liquid hydrocarbon production, and 135 million cubic feet per day (“mmcfd”) of natural gas, representing 18 percent of Marathon’s total U.S. natural gas production. Liquid hydrocarbon production decreased by 9,000 net bpd and natural gas production increased by 32 net mmcfd from the prior year. The decrease in liquid hydrocarbon production is mainly due to natural field decline. The increase in natural gas production is related to a full year of Camden Hills production in 2003 and new production from Petronius drilling, partially offset by other natural field declines. At year-end 2003, Marathon held interests in 10 producing fields and 17 platforms, of which 7 platforms are operated by Marathon.

In 2003, Marathon announced the Neptune-5 discovery, which is located in Atwater Valley Block 574 in 6,215 feet of water. This well was drilled to a total depth of 19,142 feet and encountered more than 500 feet of net oil pay. Although several hydrocarbon-bearing intervals are present, one interval has a gross hydrocarbon column thickness of more than 1,200 feet. Two appraisal sidetrack wells were also drilled. The first sidetrack well, drilled down-dip from the original Neptune-5 location, encountered a similar thickness of net oil pay and penetrated an oil water contact, which extended the gross oil column by approximately 100 feet. The second sidetrack, drilled to an up-dip location, encountered approximately 190 feet of net oil pay in several intervals. Marathon and its partners in the Neptune Unit are integrating the results of this discovery into field development studies. Marathon holds a 30 percent interest in the Neptune Unit.

Also announced in 2003, the Perseus discovery is located on Viosca Knoll Block 830 in 3,376 feet of water, approximately five miles from the existing Petronius platform. The well was drilled to a total depth of 13,134 feet and encountered over 130 net feet of oil pay in the primary targets. The Perseus discovery is expected to begin production in 2004 via an extended reach well currently being drilled from the Petronius platform and extend the plateau of the Petronius production profile. Marathon holds a 50 percent interest in the Perseus discovery and the Petronius development. Petronius is currently producing a gross average of 60,000 bpd and 100 mmcfd.

The Gulf of Mexico continues to be a core area for Marathon with the potential to add new reserves and increase production. At the end of 2003, Marathon had interests in 149 blocks in the Gulf of Mexico, including 90 in the deepwater area.

Permian Basin – The Permian Basin region extends from southeast New Mexico to west Texas. Marathon’s share of production in this region averaged 30,200 bpd and 132 mmcfd in 2003, compared to 32,400 bpd and 146 mmcfd in 2002. The reduction in liquid hydrocarbon and gas production was primarily due to the impact of the disposition of properties.

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In June 2003, MKM Partners L.P. (“MKM”), a joint venture of Marathon and Kinder Morgan Energy Partners L.P. (“Kinder Morgan”), sold its interest in the SACROC unit to Kinder Morgan. Also in June 2003, MKM was dissolved and its interest in the Yates field was distributed to Marathon and Kinder Morgan. In November 2003, Marathon sold its interest in the Yates field to Kinder Morgan. These properties contributed approximately 9,000 net bpd to 2003 production.

East Texas – Production in the East Texas gas fields averaged 73 net mmcfd in 2003 compared to 84 net mmcfd in 2002. The volume decrease was primarily due to property dispositions totaling approximately 11 mmcfd and natural field decline. Active development of the Mimms Creek Field continued in 2003 with Marathon drilling 22 wells. The 2003 drilling program has resulted in Mimms Creek’s net production increasing from 9 net mmcfd to a peak of 17 net mmcfd.

U.S. Northern Business Unit

Alaska – Marathon’s primary focus in Alaska is the expansion of its natural gas business through exploration, development and marketing. Marathon’s share of production from Alaska averaged 166 mmcfd of natural gas in 2002 and 2003.

In September 2003, Marathon began producing gas from its Ninilchik Unit in the Cook Inlet. Production is currently flowing at a gross rate of 41 mmcfd, 21 mmcfd of which is net to Marathon, and is being transported through the recently completed Kenai Kachemak Pipeline, which connects Ninilchik to the existing natural gas pipeline infrastructure serving residential, utility and industrial markets on the Kenai Peninsula, Anchorage and other parts of south-central Alaska. Marathon operates the Ninilchik Unit and holds a 60 percent interest in it and the Kenai Kachemak Pipeline.

Wyoming – Liquid hydrocarbon production for 2003 averaged 21,400 net bpd compared with 22,800 net bpd in 2002. The decrease was primarily attributed to dispositions of approximately 1,000 net bpd of liquids in non-core areas of Wyoming. Average gas production increased to 127 net mmcfd in 2003, compared to 125 net mmcfd in 2002.

In early 2001, Marathon completed the acquisition of Pennaco Energy Inc., creating a new core area of coal bed natural gas production in the Powder River Basin (“PRB”) of Wyoming. Marathon expanded its PRB assets by approximately one-third in May 2002 as a result of the acquisition of the assets owned by its major partner in this basin. Marathon now controls more than 650,000 net acres in northeast Wyoming and southeast Montana and is the largest individual acreage holder in the PRB. During 2003, Marathon drilled approximately 320 wells. For 2003, production rates of coal bed natural gas were 82 net mmcfd, compared to 79 net mmcfd in 2002.

Oklahoma – Gas production for 2003 averaged 96 net mmcfd, compared with 108 net mmcfd in 2002. The decrease in gas production was primarily due to natural field decline. In 2003, Marathon’s southern Anadarko Basin exploration efforts continued to focus on the western extension of the Cement and Marlow fields. Exploration drilling efforts resulted in five discoveries.

International

Including Marathon’s proportionate share of equity investee production, approximately 43 percent of Marathon’s 2003 worldwide liquid hydrocarbon production and 37 percent of its worldwide natural gas production was produced from international operations. During 2003, Marathon drilled 54 gross (36 net) exploratory wells of which 47 gross (32 net) wells encountered hydrocarbons. Of these 47 wells, 21 gross (14 net) wells were temporarily suspended or are in the process of completing.

Europe

U.K. North Sea – Marathon’s primary asset in the U.K. North Sea is the Brae area complex where it is the operator and owns a 42 percent interest in the South, Central, North, and West Brae fields and a 38 percent interest in the East Brae field. The Brae A platform and facilities act as the host for the underlying South Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The North Brae field, which is produced via the Brae B platform, and the East Brae field are gas-condensate fields. These fields are produced using the gas cycling technique, whereby gas is injected into the reservoir for pressure maintenance, improved sweep efficiency and increased condensate liquid recovery. Although partial cycling continues, the majority of North Brae gas is being transferred to the East Brae reservoir for pressure maintenance and sales.

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Marathon’s share of production from the Brae area averaged 17,500 bpd of liquid hydrocarbons in 2003, compared with 20,100 bpd in 2002. The decrease resulted from the natural decline in existing fields partially offset by successful development and remedial well work. Marathon’s share of Brae gas sales averaged 198 mmcfd in 2002 and 2003. Gas sales continue to be maximized on available capacity within the pipeline system.

The strategic location of the Brae platforms and pipeline infrastructure has generated third-party processing and transportation business since 1986. Currently, there are 19 agreements with third-party fields contracted to use the Brae system. In addition to generating processing and pipeline tariff revenue, this third-party business also has a favorable impact on Brae-area operations by optimizing infrastructure usage and extending the economic life of the facilities.

The Brae group owns a 50 percent interest in the outside-operated Scottish Area Gas Evacuation (“SAGE”) system. The Beryl group owns the other 50 percent. The SAGE pipeline provides transportation for Brae and Beryl area gas and has a total wet gas capacity of approximately 1,000 mmcfd. The SAGE terminal at St. Fergus in northeast Scotland provides processing for gas from the SAGE pipeline and processing for 0.8 bcfd of third party gas from the Britannia field.

During 2003, Marathon and its partners announced the startup of oil and gas production from the Marathon-operated Braemar field in the U.K. North Sea. The field was developed with a single subsea well tied back to the East Brae platform 7.5 miles to the south where liquids and gas are processed. Marathon holds a 26 percent interest in Braemar. Production from the field commenced in September 2003 at an initial condensate rate of 3,700 gross bpd and was increased in January 2004 to approximately 5,300 bpd. In August 2002, a 16-inch pipeline link, Linkline, between the Marathon operated Brae B platform and the outside-operated Miller platform was sanctioned. Marathon has a 19 percent interest in the Linkline. The Linkline will initially be used for transportation of Braemar gas that has been contracted to the Miller group for operational purposes.

As part of the ongoing rationalization of the European Business Unit, Marathon added one new block (16/1) to its inventory, and exited four blocks (22/7,22/22c,16/3d and 16/6a-S). This resulted in an overall reduction of its UK leasehold interests from 24 blocks at the start of 2003 to 21 blocks as of December 31, 2003.

U.K. Atlantic Margin – Marathon has an approximately 30 percent interest in the outside-operated Foinaven area complex. This is made up of a 28 percent interest in the main Foinaven field, 47 percent of East Foinaven and 20 percent of the single well T35 and T25 accumulations. Three successful wells were drilled in 2003. Marathon’s share of production from the Foinaven fields averaged 22,400 bpd of liquid hydrocarbons and 10 mmcfd in 2003, compared to 31,000 net bpd and 9 mmcfd in 2002. Lower production of liquid hydrocarbons was due to a five-month compressor outage, completion failure in two water injection wells, and early water breakthrough in a number of main-field producers. The compressor was returned to service in November 2003 and a remedial program is planned to address the well problems in 2004. In December 2003, production from Foinaven was averaging 25,100 net bpd and 11 net mmcfd.

Ireland – Marathon holds a 100 percent interest in the Kinsale Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea. Natural gas sales were 62 net mmcfd in 2003, compared with 81 net mmcfd in 2002. The decrease in sales is primarily the result of the timing effect associated with annual storage injection versus storage withdrawals for the Kinsale storage facility, and natural field decline.

Marathon further developed the Kinsale Head area in 2003 by drilling and developing an additional subsea gas well. The Greensand subsea gas well is designed to enhance the productivity of the main Kinsale Head natural gas producing Greensand reservoir and has been tied back to Marathon’s existing Kinsale Head Bravo platform. Production began in July 2003.

During 2002, an agreement was entered into with the Seven Heads group to provide gas processing and transportation services, as well as field operating services, for the Seven Heads gas being brought to the Kinsale offshore production facilities beginning in 2003. Production from Seven Heads commenced in December 2003. Under this agreement, Marathon provides capacity to process and transport between 60 mmcfd to 100 mmcfd of Seven Heads gas.

Marathon has an 18.5 percent interest in the Corrib gas development project, located approximately 40 miles off Ireland’s west coast. On April 30, 2003, an Irish planning authority denied the application for the proposed onshore terminal to bring ashore gas from the Corrib field. In late 2003, the project partners submitted a new application to the planning authority. Marathon has reclassified approximately 14 million BOE from proved undeveloped reserves until the terminal application is approved, which is expected to be in late 2004.

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Norway – In the Norwegian North Sea, Marathon’s share of production averaged 1,600 bpd and 16 mmcfd in 2003, compared to 800 bpd and 15 mmcfd in 2002. Marathon owns a 24 percent interest in the Heimdal field and gas-condensate processing center.

Marathon owns a 47 percent interest in the Vale field which is located northeast of the Heimdal field in 374 feet of water. This single subsea well tied back to the Heimdal platform came on line in June 2002. A further exploration well was drilled on this license in 2003 and resulted in an oil discovery called the Klegg field. The Klegg well was drilled to a total depth of 7,799 feet and encountered a gross oil column of approximately 223 feet. An evaluation of development options is underway with a decision expected in 2004.

Marathon has a 20 percent interest in the Byggve/Skirne gas-condensate field, currently in development on license PL102. This two well development is being tied back to the Heimdal platform gas processing center, with first production expected early 2004. Condensate export will be via the Heimdal-Brae-Forties system and gas export from the Heimdal transportation center.

On April 15, 2003, Marathon announced the success of the first well of its 2003 Norwegian continental shelf exploration program on the Kneler prospect in the Alvheim area. Located approximately 140 miles from Stavanger, Norway in 390 feet of water, the Kneler exploration well was drilled to total depth of 7,425 feet and encountered high quality crude oil in a gross oil column of 155 feet with 115 net feet of pay in the Heimdal formation. On May 27, 2003, Marathon announced a second discovery in the Alvheim area on the Boa well. The discovery well is located approximately 4.5 miles northwest of the Kneler discovery. The Boa well was drilled into the Heimdal formation to a total depth of 7,531 feet. This well encountered an 82 foot gross gas column and a 92 foot gross oil column. Marathon and its partners are evaluating several development scenarios for Alvheim, in which Marathon is operator and holds a 65 percent interest. Marathon expects to submit a development plan to the Norwegian authorities during the second quarter of 2004.

In December 2003, Marathon continued to grow its position offshore Norway by acquiring interests in three additional production licenses. Marathon is operator of two of the three licenses with 100 percent working interest (PL.307 and PL.311) and 40 percent in the third (PL.304). Work obligations have been established to promote rapid exploration of these offshore areas.

Netherlands – Divestment of Marathon’s interest in CLAM Petroleum B.V. (“CLAM”) was completed in May 2003.

West Africa

Equatorial Guinea —During 2002, in two separate transactions, Marathon acquired interests totaling 63 percent in the Alba field. Additionally, in these transactions, Marathon acquired a net 52 percent interest in an onshore liquefied petroleum gas processing plant and a 45 percent net interest in an onshore methanol production plant, both held through separate equity method investees.

The large scale Alba field Phase 2 expansion, which began in 2002, made significant progress in 2003. The field development and condensate production expansion portions of the project (Phase 2A) were greater than 90% complete at year end, with completion expected around April 1 ^st of 2004. Work completed in 2003 included:

As a result of the Phase 2A expansion, gross condensate production had grown from 18,000 to 30,000 bpd (15,800 net) at the end of 2003. At the completion of Phase 2A, gross condensate production will be further increased to approximately 54,000 bpd (30,000 net).

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The second phase of additional development (Phase 2B) includes fabrication and installation of a full process steam LPG cryogenic gas plant and associated storage, marine terminal, and fractionation equipment for propane and heavier gas components. This addition is expected to result in additional gross condensate production of 5,000 (2,600 net) bpd. Additionally, 20,000 (11,600 net) bpd of LPG is expected to be recovered. Phase 2B is expected to be completed near the end of 2004 raising total liquid production to a level of approximately 79,000 bpd.

On July 23, 2003, Marathon announced a natural gas discovery on Block D offshore Equatorial Guinea, where Marathon is operator with a 90 percent interest. The discovery well is on the Bococo prospect, located in 238 feet of water, approximately six miles west of the Alba gas/condensate field. The well was drilled to a depth of 6,110 feet and encountered 185 feet of net gas pay. The well has been suspended for reentry at a later date. The Bococo gas discovery complements three earlier dry gas discoveries on Block D for future development.

Marathon is currently evaluating the results of the recently drilled Deep Luba prospect, which will test for potential resources under the Alba field. This well was drilled from an Alba platform, which could enable early production if successful.

Gabon – Marathon is operator of the Tchatamba South, Tchatamba West and Marin fields with a 56 percent working interest. Production in Gabon averaged 14,700 net bpd of liquid hydrocarbons in 2003, compared with 16,700 net bpd in 2002. The decrease is attributable to the timing of liftings. Development work during 2003 brought production levels at the Tchatamba fields up to the facility capacity of approximately 42,000 gross bpd.

Angola – Offshore Angola, Marathon has a 10 percent working interest in Block 31 and a 30 percent working interest in Block 32. In 2002, Marathon participated in the first ultra-deepwater discovery in Block 31. The discovery, the Plutao 1-A, was drilled to a total depth of 14,607 feet and tested 5,357 bpd through a 48/64–inch choke. In 2003, Marathon announced additional discoveries in Block 31, including the Saturno-1 and Marte-1 wells. The Saturno-1 was drilled to a total depth of 15,444 feet and tested at a maximum rate of 5,000 bpd. The Marte-1 discovery well was drilled to a total depth of 13,756 feet and tested at a maximum rate of 5,200 bpd. Development options for Block 31 are currently being evaluated. Also on Block 31, Marathon has participated in the Venus well, which has reached total depth. Results of the Venus well will be reported upon government approvals.

In 2003, Marathon announced the first discovery on Block 32. The Gindungo-1 well was drilled in a water depth of 4,739 feet and successively tested at rates of 7,400 and 5,700 barrels of light oil per day from two separate zones. Also on Block 32, Marathon has participated in the Canela well located approximately 8 miles south of the Gindungo discovery on Block 32. The Canela well has reached total depth. Results of the Canela well will be reported upon government approvals.

Other International

Russia – On May 13, 2003 Marathon Oil Corporation announced that it had completed the acquisition of KMOC for an aggregate purchase price of approximately $285 million, including the assumption of $31 million in debt. KMOC currently produces approximately 16,000 net bpd in the Khanty Mansiysk region of western Siberia in the Russian Federation.

Western Canada – On October 1, 2003, Marathon completed the sale of the operations in western Canada for $612 million.

Eastern Canada – In 2002, Marathon 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 approximately 100 feet of net gas pay over several zones. Marathon is operator and has a 30 percent interest in the Annapolis lease. In addition, Marathon is operator of the adjacent Empire and Cortland leases with 50 percent and 75 percent interests, respectively. During 2003, 3-D seismic was acquired over both blocks to better define the trend.

Qatar – Marathon and three other companies are parties to a memorandum of understanding to further explore the possibility of developing a portion of the North field offshore Qatar. Marathon and its partners are pursuing technical and commercial discussions with Qatar Petroleum that could lead to a GTL, LPG and condensate project as part of the northern field development.

Libya – Marathon is a member of the Oasis Group, which acquired exploration and production rights in six concessions in the mid-1950s. Marathon has a 16.3 percent interest in these concessions. In 1986, the Oasis Group ceased active participation in the concessions following the imposition of trade sanctions by the U. S. government.

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In 2002, the U. S. State Department reaffirmed the authority of the Oasis Group to hold discussions with representatives of the Libyan National Oil Company and the Libyan government relative to the future of the concessions. Based on the U.S. Government’s recent announcement on February 26, 2004, the Oasis Group is in active discussions with the Libyan National Oil Company concerning the negotiation of terms for their eventual return to the country.

The above discussions include forward-looking statements concerning the Phase 2A and Phase 2B expansion projects, including estimated completion dates, development plans, expected production levels, dates of initial production, which are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, reserve replacement rates, drilling rig availability, unforeseen problems arising from construction and other geological, operating and economic considerations. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to severe weather conditions, such as hurricanes or violent storms or other hazards. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations and tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations.

Reserves

At December 31, 2003, Marathon’s net proved liquid hydrocarbon and natural gas reserves, including its proportionate share of equity investees’ net proved reserves, totaled approximately 1.0 billion BOE, of which 46 percent were located in the United States. (For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet (“mcf”) by six. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE.)

Proved developed reserves represented 70 percent of total proved reserves as of December 31, 2003, as compared to 78 percent as of December 31, 2002. The decrease primarily reflects the disposition of the Yates field. Of the just over 300 mmboe of proved undeveloped reserves at year-end 2003, only 10 percent have been included as proved reserves for more than two years. On a BOE basis, excluding dispositions, Marathon replaced 124 percent of its 2003 worldwide oil and gas production. Excluding acquisitions and dispositions, Marathon replaced 76 percent of worldwide oil and gas production.

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The following table sets forth estimated quantities of net proved oil and gas reserves at the end of each of the last three years.

Estimated Quantities of Net Proved Oil and Gas Reserves at December 31

The above estimates, which are forward-looking statements, are based on a number of assumptions, including (among others) prices, presently known physical data concerning size and character of the reservoirs, economic recoverability, production experience and other operating considerations. To the extent these assumptions prove inaccurate, actual recoveries could be different than current estimates.

For additional details of estimated quantities of net proved oil and gas reserves at the end of each of the last three years, see “Consolidated Financial Statements and Supplementary Data – Supplementary Information on Oil and Gas Producing Activities – Estimated Quantities of Proved Oil and Gas Reserves” on pages F-45 through F-46. Marathon has filed reports with the U.S. Department of Energy (“DOE”) for the years 2002 and 2001 disclosing the year-end estimated oil and gas reserves. Marathon will file a similar report for 2003. The year-end estimates reported to the DOE are the same as the estimates reported in the Supplementary Information on Oil and Gas Producing Activities.

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Delivery Commitments

Marathon has commitments to deliver fixed and determinable quantities of natural gas to customers under a variety of contractual arrangements.

In Alaska, Marathon has two long-term sales contracts with the local utility companies, which obligates Marathon to supply approximately 213 bcf of natural gas over the remaining life of these contracts, which terminate in 2012 and 2016. In addition, Marathon has a 30 percent ownership interest in a Kenai, Alaska, LNG plant and a proportionate share of the long-term LNG sales obligation to two Japanese utility companies. This obligation is estimated to total 138 bcf through the remaining life of the contract, which terminates March 31, 2009. These commitments are structured with variable-pricing terms. Marathon’s production from various gas fields in the Cook Inlet supply the natural gas to service these contracts. Marathon’s proved reserves and estimated production rates in the Cook Inlet sufficiently meet these contractual obligations.

In the U.K., Marathon has two long-term sales contracts with utility companies, which obligate Marathon to supply approximately 236 bcf of natural gas through September 2009. Marathon’s Brae area production, together with natural gas acquired for injection and subsequent resale, will supply the natural gas to service these contracts. Marathon’s Brae area proved reserves, acquired natural gas contracts and estimated production rates sufficiently meet these contractual obligations. The terms of these gas sales contracts also reflect variable-pricing structures.

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Productive and Drilling Wells

The following tables set forth productive wells and service wells for each of the last three years and drilling wells as of December 31, 2003.

Gross and Net Wells

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Drilling Activity

The following table sets forth, by geographic area, the number of net productive and dry development and exploratory wells completed in each of the last three years (references to “net” wells or production indicate Marathon’s ownership interest or share, as the context requires):

Oil and Gas Acreage

The following table sets forth, by geographic area, the developed and undeveloped oil and gas acreage that Marathon held as of December 31, 2003:

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Refining, Marketing and Transportation

RM&T operations are primarily conducted by MAP and its subsidiaries, including its wholly owned subsidiaries, Speedway SuperAmerica LLC (“SSA”) and Marathon Ashland Pipe Line LLC.

Refining

MAP owns and operates seven refineries with an aggregate refining capacity of 935,000 barrels of crude oil per day. The table below sets forth the location and daily throughput capacity of each of MAP’s refineries as of December 31, 2003:

MAP’s refineries include crude oil atmospheric and vacuum distillation, fluid catalytic cracking, catalytic reforming, desulfurization and sulfur recovery units. The refineries have the capability to process a wide variety of crude oils and to produce typical refinery products, including reformulated gasoline. MAP’s refineries are integrated via pipelines and barges to maximize operating efficiency. The transportation links that connect the refineries allow the movement of intermediate products to optimize operations and the production of higher margin products. For example, naphtha may be moved from Texas City to Robinson where excess reforming capacity is available; gas oil may be moved from Robinson to Detroit where excess fluid catalytic cracking unit capacity is available; and light cycle oil may be moved from Texas City to Robinson where excess desulfurization capacity is available.

MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions and industrial asphalts. MAP manufactures petroleum pitch, primarily used in the graphite electrode, clay target and refractory industries. Additionally, MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base lube oil, polymer grade propylene and slack wax.

During 2003, MAP’s refineries processed 917,000 bpd of crude oil and 138,000 bpd of other charge and blend stocks. The following table sets forth MAP’s refinery production by product group for each of the last three years:

Planned maintenance activities requiring temporary shutdown of certain refinery operating units, or turnarounds, are periodically performed at each refinery. MAP initiated major turnarounds at its Catlettsburg, Garyville, and Texas City refineries in 2003.

Technology upgrades and expansions of the fluid catalytic cracking units (“FCCU”) at the Garyville and Texas City refineries were completed during early 2003. These projects have increased combined FCCU capacity by over 20,000 bpd, and resulted in improved yields, reduced operating costs, and enhanced reliability of these facilities.

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At its Catlettsburg, Kentucky refinery, MAP has completed the approximately $440 million multi-year integrated investment program to upgrade product yield realizations and reduce fixed and variable manufacturing expenses. This program involves the expansion, conversion and retirement of certain refinery processing units that, in addition to improving profitability, will allow the refinery to begin producing low-sulfur (TIER 2) gasoline. Project startup was in the first quarter of 2004.

In the fourth quarter of 2003, MAP commenced approximately $300 million in new capital projects for its 74,000 bpd Detroit, Michigan refinery. One of the projects, a $110 million expansion project, is expected to raise the crude oil capacity at the refinery by 35 percent to 100,000 bpd. Other projects are expected to enable the refinery to produce new clean fuels and further control regulated air emissions. Completion of the projects is scheduled for the fourth quarter of 2005. Marathon will loan MAP the funds necessary for these upgrade and expansion projects.

Marketing

In 2003, MAP’s refined product sales volumes (excluding matching buy/sell transactions) totaled 19.8 billion gallons (1,293,000 bpd). Excluding sales related to matching buy/sell transactions, the wholesale distribution of petroleum products to private brand marketers and to large commercial and industrial consumers, primarily located in the Midwest, the upper Great Plains and the Southeast, and sales in the spot market, accounted for approximately 70 percent of MAP’s refined product sales volumes in 2003. Approximately 50 percent of MAP’s gasoline volumes and 91 percent of its distillate volumes were sold on a wholesale or spot market basis to independent unbranded customers or other wholesalers in 2003.

Approximately half of MAP’s propane is sold into the home heating markets and industrial consumers purchase the balance. Propylene, cumene, aromatics, aliphatics, and sulfur are marketed to customers in the chemical industry. Base lube oils and slack wax are sold throughout the United States. Pitch is also sold domestically, but approximately 13 percent of pitch products are exported into growing markets in Canada, Mexico, India, and South America.

MAP markets asphalt through owned and leased terminals throughout the Midwest and Southeast. The MAP customer base includes approximately 900 asphalt-paving contractors, government entities (states, counties, cities and townships) and asphalt roofing shingle manufacturers.

The following table sets forth the volume of MAP’s consolidated refined product sales by product group for each of the last three years:

Refined Product Sales

MAP sells reformulated gasoline in parts of its marketing territory, primarily Chicago, Illinois; Louisville, Kentucky; northern Kentucky; and Milwaukee, Wisconsin. MAP also sells low-vapor-pressure gasoline in nine states.

As of December 31, 2003, MAP supplied petroleum products to approximately 3,900 Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located in Florida, Georgia, Wisconsin, West Virginia, Minnesota, Tennessee, Virginia, Pennsylvania, North Carolina, South Carolina and Alabama.

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Retail sales of gasoline and diesel fuel were also made through company-operated outlets by SSA. As of December 31, 2003, this subsidiary had 1,775 retail outlets in 9 states that sold petroleum products and convenience-store merchandise and services, primarily under the brand names “Speedway” and “SuperAmerica.” SSA’s revenues from the sale of convenience-store merchandise totaled $2.2 billion in 2003, compared with $2.4 billion in 2002. Profit levels from the sale of such merchandise and services tend to be less volatile than profit levels from the retail sale of gasoline and diesel fuel. During 2003, SSA withdrew from markets in the Southeast when it sold 190 convenience stores located in Florida, South Carolina, North Carolina and Georgia for approximately $140 million plus store inventory.

Pilot Travel Centers LLC (“PTC”), a joint venture with Pilot Corporation (“Pilot”), is the largest operator of travel centers in the United States with approximately 260 locations in 34 states. The travel centers offer diesel fuel, gasoline and a variety of other services, including on-premises brand name restaurants. On February 27, 2003, PTC purchased 60 retail travel centers from the Williams Companies located in 15 states, primarily in the Midwest, Southeast and Southwest. Pilot and MAP each own a 50 percent interest in PTC.

MAP’s retail marketing strategy is focused on SSA’s Midwest operations, additional growth of the Marathon brand, and continued growth for PTC.

Supply and Transportation

MAP obtains the crude oil it processes from negotiated contracts and spot purchases or exchanges. In 2003, MAP’s net purchases of U.S. produced crude oil for refinery input averaged 422,000 bpd, including a net 30,000 bpd from Marathon. In 2003, Canada was the source for 13 percent or 122,000 bpd of crude oil processed and other foreign sources supplied 41 percent or 373,000 bpd of the crude oil processed by MAP’s refineries, including approximately 225,000 bpd from the Middle East. This crude was acquired from various foreign national oil companies, producing companies and traders.

MAP operates a system of pipelines and terminals to provide crude oil to its refineries and refined products to its marketing areas. At December 31, 2003, MAP owned, leased, or had an ownership interest in approximately 3,073 miles of crude oil trunk lines and 3,850 miles of product trunk lines. MAP owns a 47 percent interest in LOOP LLC (“LOOP”), which is the owner and operator of the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 50 percent interest in LOCAP LLC, which owns a crude oil pipeline connecting LOOP and the Capline system; and a 37 percent interest in the Capline system, a large diameter crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois.

MAP also has a 33 percent ownership interest in Minnesota Pipe Line Company, which owns a crude oil pipeline in Minnesota. Minnesota Pipe Line Company provides MAP with access to crude oil common carrier transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of MAP’s St. Paul Park, Minnesota refinery.

On February 10, 2003, MAP increased its ownership in Centennial Pipeline LLC from 33 percent to 50 percent and as of December 31, 2003, MAP and Texas Eastern Products Pipeline Company, L.P. own Centennial Pipeline LLC 50 percent each. The Centennial Pipeline system connects Gulf Coast refineries with the Midwest market.

In the fourth quarter 2003, a MAP subsidiary, Ohio River Pipe Line LLC, completed the construction of the Cardinal Products Pipeline, which extends from Kenova, West Virginia to Columbus, Ohio. The first deliveries from the pipeline occurred in late December 2003. The pipeline is an interstate common carrier pipeline and is expected to initially move approximately 36,000 bpd of refined petroleum into the central Ohio region. The pipeline, which has a capacity of up to 80,000 bpd, is expected to provide a stable, cost effective supply of gasoline, diesel and jet fuel to this market.

MAP’s 88 light product and asphalt terminals are strategically located throughout the Midwest, upper Great Plains and Southeast. These facilities are supplied by a combination of pipelines, barges, rail cars and/or trucks. MAP’s marine transportation operations include towboats and barges that transport refined products on the Ohio, Mississippi and Illinois rivers, their tributaries and the Intercoastal Waterway. MAP also leases and owns rail cars in various sizes and capacities for movement and storage of petroleum products and a large number of tractors, tank trailers and general service trucks.

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The above RM&T discussions include forward-looking statements concerning anticipated completion of refinery projects and the operation of the Cardinal Products Pipeline. Some factors that could potentially cause actual results for the refinery projects to differ materially from present expectations include (among others) price of petroleum products, levels of cash flow from operations, unforeseen problems arising from construction, regulatory approval constraints and unforeseen hazards such as weather conditions and delays in construction. Some factors that could affect the pipeline system include the price of petroleum products and other supply issues. This forward-looking information may prove to be inaccurate and actual results may differ from those presently anticipated.

Other Energy Related Businesses

Marathon operates other businesses that market and transport its own and third-party natural gas, crude oil and products manufactured from natural gas, such as LNG and methanol, primarily in the United States, Europe and West Africa. Some of these businesses, as well as other business projects under development, comprise Marathon’s integrated gas strategy.

Marathon owns an interest in the following pipeline systems: a 29 percent interest in Odyssey Pipeline LLC and a 28 percent interest in Poseidon Oil Pipeline Company, LLC (both Gulf of Mexico crude oil pipeline systems); a 24 percent interest in Nautilus Pipeline Company, LLC and a 24 percent interest in Manta Ray Offshore Gathering Company, LLC (both Gulf of Mexico natural gas pipeline systems); a 17 percent interest in Explorer Pipeline Company (a light product pipeline system extending from the Gulf of Mexico to the Midwest); and a 6 percent interest in Wolverine Pipe Line Company (a light product pipeline system extending from Chicago, IL to Toledo, OH). None of these refined product systems are part of MAP. Marathon also holds interests in some smaller offshore Gulf of Mexico oil pipeline systems.

Marathon owns a 34 percent ownership interest in the Neptune natural gas processing plant located in St. Mary Parish, Louisiana, which commenced operations on March 20, 2000. The plant has the capacity to process 300 mmcfd of natural gas, which is supplied by the Nautilus pipeline system, and is being expanded to 600 mmcfd capacity effective early 2004.

In addition to the sale of its own oil and natural gas production, Marathon purchases oil and gas from third party producers and marketers for resale.

Marathon owns a 30 percent interest in a Kenai, Alaska, natural gas liquefication plant and two 87,500 cubic meter tankers used to transport LNG to customers in Japan. Feedstock for the plant is supplied from a portion of Marathon’s natural gas production in the Cook Inlet. From the first production in 1969, the LNG has been sold under a long-term contract with two of Japan’s largest utility companies. Marathon has a 30 percent participation in this contract, which will continue through March 31, 2009. LNG deliveries totaled 66 gross bcf (22 net bcf) in 2003.

On January 3, 2002, Marathon acquired a 45 percent interest in a methanol plant located in Malabo, Equatorial Guinea from CMS Energy. Feedstock for the plant is supplied from a portion of Marathon’s natural gas production in the Alba field. Methanol production totaled 836,000 gross metric tons (376,000 net metric tons) in 2003. Production from the plant is used to supply customers in Europe and the U.S.

In August 2002, Marathon acquired the rights to deliver up to 58 bcf of LNG annually to the Elba Island LNG terminal near Savannah, Georgia. The contract has a 17-year term with an option to extend for an additional five-year period. The agreement provides for the right to deliver LNG under a put option with the capacity owner of the facility and, under certain conditions, take redelivery of natural gas for onward sale to third parties.

Marathon’s Atlantic Basin integrated gas activity centers around the monetization of Marathon’s gas reserves from the Alba field. This proposed project would involve construction of a 3.4 million metric tonnes per year LNG facility located on Bioko Island, Equatorial Guinea, with startup currently projected for late 2007. In the second quarter of 2003, Marathon, the Government of Equatorial Guinea, and GEPetrol, the national oil company of Equatorial Guinea, signed a heads of agreement on fiscal terms and conditions for the development of the LNG facility. In addition, Marathon signed a letter of understanding with BG Gas Marketing, Ltd. (“BGML”), a subsidiary of BG Group plc, under which BGML would purchase the LNG plant’s production for a period of 17 years. BGML has stated its intent to deliver the LNG primarily to the LNG receiving terminal in Lake Charles, Louisiana, where it would be regasified and delivered into the Gulf Coast natural gas pipeline grid. The provisions of the letter of understanding are subject to a definitive purchase and sale agreement, which the parties expect to finalize in the second quarter of 2004.

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In the Pacific Basin, one of the integrated gas projects Marathon has been pursuing, the Tijuana Regional Energy Center, will not proceed. Marathon has been unable to make significant progress on this project, principally due to the lack of local and regional support that would be necessary to obtain land use and other key permits. More recently, the Baja California State Government announced plans to expropriate land, on which Marathon and its partners held options to purchase, that would have been the site for the proposed project.

Marathon has been engaged in GTL research and development since the early 1990s with the goal of creating a process and facility capable of converting natural gas into ultra-clean diesel fuel. Currently, Marathon is participating in a GTL demonstration plant at the Port of Catoosa near Tulsa, Oklahoma. Dedicated during the fourth quarter of 2003, this complex is part of the Department of Energy’s Ultra-Clean Fuels Program. This GTL technology development is being pursued in conjunction with Marathon’s proposed Qatar GTL project.

In the first quarter of 2004, Marathon will realign its segment reporting. A new segment, Integrated Gas, will be introduced and the Other Energy Related Businesses (“OERB”) segment will be eliminated. Of the business activities discussed above, the Gulf of Mexico crude oil pipeline systems, crude oil marketing activities and the Catoosa demonstration plant will be reported in the Exploration and Production segment. The refined products pipeline systems will be reported in the Refining, Marketing and Transportation segment. The remaining activities will comprise the Integrated Gas segment which will consist of LNG facilities, certain midstream gas plants and pipelines, non-equity natural gas marketing activity, and continued execution of other integrated gas strategies in the Atlantic and Pacific Basins, which may or may not be connected to Marathon’s E&P activity. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook” on page 47.

The above OERB discussion contains forward looking statements concerning the plans for a LNG facility and a LNG offtake transaction. Factors that could affect the plans for the LNG plant and LNG offtake transaction include the successful negotiation and execution of definitive purchase and sale agreements for gas supply and LNG offtake, board approval of the transactions, approval of the LNG project by the Government of Equatorial Guinea, unforeseen difficulty in negotiation of definitive agreements among project participants, inability or delay in obtaining necessary government and third-party approvals, unanticipated changes in market demand or supply, competition with similar projects, 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.

Competition and Market Conditions

Strong competition exists in all sectors of the oil and gas industry and, in particular, in the exploration and development of new reserves. Marathon competes with major integrated and independent oil and gas companies for the acquisition of oil and gas leases and other properties, for the equipment and labor required to develop and operate those properties and in the marketing of oil and natural gas to end-users. Many of Marathon’s competitors have financial and other resources greater than those available to Marathon. As a consequence, Marathon may be at a competitive disadvantage in bidding for the rights to explore for oil and gas. Acquiring the more attractive exploration opportunities frequently requires competitive bids involving front-end bonus payments or commitments-to-work programs. Marathon also competes in attracting and retaining personnel, including geologists, geophysicists and other specialists. Based on industry sources, Marathon believes it currently ranks eighth among U.S.-based petroleum corporations on the basis of 2002 worldwide liquid hydrocarbon and natural gas production.

Marathon through MAP must also compete with a large number of other companies to acquire crude oil for refinery processing and in the distribution and marketing of a full array of petroleum products. MAP believes it ranks fifth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 2004. MAP competes in four distinct markets – wholesale, spot, branded and retail distribution—for the sale of refined products and believes it competes with about 40 companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; about 80 companies in the sale of petroleum products in the spot market; 11 refiner/marketers in the supply of branded petroleum products to dealers and jobbers; and approximately 275 petroleum product retailers in the retail sale of petroleum products. Marathon competes in the convenience store industry through SSA’s retail outlets. The retail outlets offer consumers gasoline, diesel fuel (at selected locations) and a broad mix of other merchandise and services. Some locations also have on-premises brand-name restaurants such as Subway ^™ . Marathon also competes in the travel center industry through its 50 percent ownership in PTC.

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Marathon’s operating results are affected by price changes in crude oil, natural gas and petroleum products, as well as changes in competitive conditions in the markets it serves. Generally, results from production operations benefit from higher crude oil and natural gas prices while refining and marketing margins may be adversely affected by crude oil price increases. Market conditions in the oil and gas industry are cyclical and subject to global economic and political events and new and changing governmental regulations.

The Separation

On December 31, 2001, pursuant to an Agreement and Plan of Reorganization dated as of July 31, 2001 (“Reorganization Agreement”), Marathon completed the Separation, in which:

As a result of the Separation, Marathon and United States Steel are separate companies, and neither has any ownership interest in the other. Thomas J. Usher is chairman of the board of both companies, and, as of December 31, 2003, four of the ten remaining members of Marathon’s board of directors are also directors of United States Steel.

In connection with the Separation and pursuant to the Plan of Reorganization, Marathon and United States Steel have entered into a series of agreements governing their relationship after the Separation and providing for the allocation of tax and certain other liabilities and obligations arising from periods before the Separation. The following is a description of the material terms of two of those agreements.

Financial Matters Agreement

Under the financial matters agreement, United States Steel has assumed and agreed to discharge all Marathon’s principal repayment, interest payment and other obligations under the following, including any amounts due on any default or acceleration of any of those obligations, other than any default caused by Marathon:

The financial matters agreement also provides that, on or before the tenth anniversary of the Separation, United States Steel will provide for Marathon’s discharge from any remaining liability under any of the assumed industrial revenue bonds. United States Steel may accomplish that discharge by refinancing or, to the extent not refinanced, paying Marathon an amount equal to the remaining principal amount of all accrued and unpaid debt service outstanding on, and any premium required to immediately retire, the then outstanding industrial revenue bonds. $2 million of the industrial revenue bonds are scheduled to mature in the period extending through December 31, 2009.

Under the financial matters agreement, United States Steel shall have the right to exercise all of the existing contractual rights under the lease obligations assumed from Marathon, including all rights related to purchase options, prepayments or the grant or release of security interests. United States Steel shall have no right to increase amounts due under or lengthen the term of any of the assumed lease obligations without the prior consent of Marathon other than extensions set forth in the terms of the assumed lease obligations.

The financial matters agreement also requires United States Steel to use commercially reasonable efforts to have Marathon released from its obligations under a guarantee Marathon provided with respect to all United States Steel’s obligations under a partnership agreement between United States Steel, as general partner, and General Electric Credit Corporation of Delaware and Southern Energy Clairton, LLC, as limited partners. United States Steel may dissolve the partnership under certain circumstances including if it is required to fund

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accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures.

The financial matters agreement requires Marathon to use commercially reasonable efforts to take all necessary action or refrain from acting so as to assure compliance with all covenants and other obligations under the documents relating to the assumed obligations to avoid the occurrence of a default or the acceleration of the payment obligations under the assumed obligations. The agreement also obligates Marathon to use commercially reasonable efforts to obtain and maintain letters of credit and other liquidity arrangements required under the assumed obligations.

United States Steel’s obligations to Marathon under the financial matters agreement are general unsecured obligations that rank equal to United States Steel’s accounts payable and other general unsecured obligations. The financial matters agreement does not contain any financial covenants, and United States Steel is free to incur additional debt, grant mortgages on or security interests in its property and sell or transfer assets without our consent.

Tax Sharing Agreement

Marathon and United States Steel have a tax sharing agreement that applies to each of their consolidated tax reporting groups. Provisions of this agreement include the following:

Under the general tax sharing principles in effect before the Separation:

In accordance with the tax sharing agreement, at the time of the Separation, Marathon made a preliminary settlement with United States Steel of approximately $440 million as the net tax sharing payments owed to it for the year ended December 31, 2001 under the pre-Separation tax sharing principles.

The tax sharing agreement also addresses the handling of tax audits and contests and other matters respecting taxable periods, or portions of taxable periods, ended before December 31, 2001.

In the tax sharing agreement, each of Marathon and United States Steel promised the other party that it:

The prescribed actions and transactions include:

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In case a taxing authority seeks to collect a tax liability from one party that the tax sharing agreement has allocated to the other party, the other party has agreed in the sharing agreement to indemnify the first party against that liability.

Even if the Separation otherwise qualified for tax-free treatment under section 355 of the Internal Revenue Code, the Separation may become taxable to Marathon under section 355(e) of the Internal Revenue Code if capital stock representing a 50 percent or greater interest in either Marathon or United States Steel is acquired, directly or indirectly, as part of a plan or series of related transactions that include the Separation. For this purpose, a “50 percent or greater interest” means capital stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of capital stock. To minimize this risk, both Marathon and United States Steel agreed in the tax sharing agreement that they would not enter into any transactions or make any change in their equity structures that could cause the Separation to be treated as part of a plan or series of related transactions to which those provisions of section 355(e) of the Internal Revenue Code may apply. If an acquisition occurs that results in the Separation being taxable under section 355(e) of the Internal Revenue Code, the agreement provides that the resulting corporate tax liability will be borne by the party involved in that acquisition transaction.

Although the tax sharing agreement allocates tax liabilities relating to taxable periods ending on or prior to the Separation, each of Marathon and United States Steel, as members of the same consolidated tax reporting group during any portion of a taxable period ended on or prior to the date of the Separation, is jointly and severally liable under the Internal Revenue Code for the federal income tax liability of the entire consolidated tax reporting group for that year. To address the possibility that the taxing authorities may seek to collect all or part of a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions that would entitle the party from whom the taxing authorities are seeking collection to obtain indemnification from the other party, to the extent the agreement allocates that liability to that other party. Marathon can provide no assurance, however, that United States Steel will be able to meet its indemnification obligations, if any, to Marathon that may arise under the tax sharing agreement.

Obligations Associated with the Separation as of December 31, 2003

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Obligations Associated with the Separation of United States Steel” on page 43 for a discussion of Marathon’s obligations associated with the Separation.

Environmental Matters

Marathon maintains a comprehensive environmental policy overseen by the Corporate Governance and Nominating Committee of Marathon’s Board of Directors. Marathon’s Health, Environment and Safety organization has the responsibility to ensure that Marathon’s operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Health, Environment and Safety Management Committee, which is comprised of officers of Marathon, is charged with reviewing its overall performance with various environmental compliance programs. Marathon also has an Emergency Management Team, composed of senior management, which oversees the response to any major emergency environmental incident involving Marathon or any of its properties.

Marathon’s businesses are subject to numerous laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act (“CAA”) with respect to air emissions, the Clean Water Act (“CWA”) with respect to water discharges, the Resource Conservation and Recovery Act (“RCRA”) with respect to solid and hazardous waste treatment, storage and disposal, the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) with respect to releases and remediation of hazardous substances and the Oil Pollution Act of 1990 (“OPA-90”) with respect to oil pollution and response. In addition, many states where Marathon operates have similar laws dealing with the same matters. These laws and their associated regulations are subject to frequent change and many of them have become more stringent. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on Marathon for the conduct of others or conditions others have caused, or for Marathon’s acts that complied with all applicable requirements when we performed them. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable, due in part to the fact that certain implementing regulations for some environmental laws have not yet been finalized or, in some instances, are undergoing revision. These environmental laws and regulations, particularly the 1990

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Amendments to the CAA and its implementing regulations, new water quality standards and stricter fuel regulations, could result in increased capital, operating and compliance costs.

For a discussion of environmental capital expenditures and costs of compliance for air, water, solid waste and remediation, see “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies” on page 45 and “Legal Proceedings” on page 24.

Air

Of particular significance to MAP are EPA regulations that require reduced sulfur levels in the manufacture of gasoline and on-road diesel fuel starting in 2004 and 2006, respectively. Marathon estimates that MAP’s combined capital costs to achieve compliance with these rules could amount to approximately $900 million, which includes costs that could be incurred as part of other refinery upgrade projects, between 2002 and 2006. Some factors that could potentially affect MAP’s gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, completion of project detailed engineering, and project construction and logistical considerations.

The U.S. EPA has finalized new and revised National Ambient Air Quality Standards (“NAAQS”) for fine particulate emissions (PM2.5) and ozone. In connection with these new standards, EPA will designate certain areas as “nonattainment,” meaning that the air quality in such areas do not meet the NAAQS. To address these nonattainment areas EPA has proposed a rule called the Interstate Air Quality Rule (“IAQR”) that will require significant reductions of SO2 and NOx emissions in numerous states. All of Marathon’s refinery operations are located within these affected states. If this rule is finalized, it could have a significant impact on Marathon’s operations as well as the operations of many of Marathon’s competitors. At this time, Marathon cannot determine whether the IAQR will be finalized or whether it will be substantially changed before it is final. As a result, Marathon cannot presently reasonably estimate the financial impact of such a rule.

Water

Marathon maintains numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA and has implemented systems to oversee its compliance efforts. In addition, Marathon is regulated under OPA-90, which amended the CWA. Among other requirements, OPA-90 requires the owner or operator of a tank vessel or a facility to maintain an emergency plan to respond to releases of oil or hazardous substances. Also, in case of such releases OPA-90 requires responsible companies to pay resulting removal costs and damages, provides for civil penalties and imposes criminal sanctions for violations of its provisions.

Additionally, OPA-90 requires that new tank vessels entering or operating in U.S. waters be double hulled and that existing tank vessels that are not double-hulled be retrofitted or removed from U.S. service, according to a phase-out schedule. As of December 31, 2003, all of the barges used in MAP’s river transportation operations meet the double-hulled requirements of OPA-90.

Marathon operates facilities at which spills of oil and hazardous substances could occur. Several coastal states in which Marathon operates have passed state laws similar to OPA-90, but with expanded liability provisions, including provisions for cargo owner responsibility as well as ship owner and operator responsibility. Marathon has implemented emergency oil response plans for all of its components and facilities covered by OPA-90.

Solid Waste

Marathon continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of underground storage tanks (“USTs”) containing regulated substances. Since the EPA has not yet promulgated implementing regulations for all provisions of RCRA and has not yet made clear the practical application of all the implementing regulations it has promulgated, the ultimate cost of compliance with this statute cannot be accurately estimated. In addition, new laws are being enacted and regulations are being adopted by various regulatory agencies on a continuing basis, and the costs of compliance with these new rules can only be broadly appraised until their implementation becomes more accurately defined.

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Remediation

Marathon owns or operates certain retail outlets where, during the normal course of operations, releases of petroleum products from USTs have occurred. Federal and state laws require that contamination caused by such releases at these sites be assessed and remediated to meet applicable standards. The enforcement of the UST regulations under RCRA has been delegated to the states, which administer their own UST programs. Marathon’s obligation to remediate such contamination varies, depending on the extent of the releases and the stringency of the laws and regulations of the states in which it operates. A portion of these remediation costs may be recoverable from the appropriate state UST reimbursement fund once the applicable deductible has been satisfied. Accruals for remediation expenses and associated reimbursements are established for sites where contamination has been determined to exist and the amount of associated costs is reasonably determinable.

As a general rule, Marathon and Ashland retained responsibility for certain remediation costs arising out of the prior ownership and operation of businesses transferred to MAP. Such continuing responsibility, in certain situations, may be subject to threshold or sunset agreements, which gradually diminish this responsibility over time.