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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

Commission file number 1-5153

Marathon Oil Corporation

(Exact name of registrant as specified in its charter)

5555 San Felipe Road, Houston, TX 77056-2723

(Address of principal executive offices)

Tel. No. (713) 629-6600

Securities registered pursuant to Section 12 (b) of the Act:*

Title of Each Class

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  þ No  ¨

Aggregate market value of Common Stock held by non-affiliates as of June 30, 2003: $8 billion. The amount shown is based on the closing price of the registrant’s Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are “affiliates” within the meaning of Rule 405 under the Securities Act of 1933.

There were 310,648,972 shares of Marathon Oil Corporation Common Stock outstanding as of January 31, 2004.

Documents Incorporated By Reference:

Portions of the registrant’s proxy statement relating to its 2004 annual meeting of stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, are incorporated by reference to the extent set forth in Part III, Items 10-14 of this report.

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MARATHON OIL CORPORATION

Unless the context otherwise indicates, references in this Form 10-K to “Marathon,” “we,” or “us” are references to Marathon Oil Corporation, its wholly owned and majority owned subsidiaries, and its ownership interest in equity investees (corporate entities, partnerships, limited liability companies and other ventures, in which Marathon exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent).

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Disclosures Regarding Forward-Looking Statements

This annual report on Form 10-K, particularly Item 1. and Item 2. Business and Properties, Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements typically contain words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “plans”, “predicts” or “projects” or variations of these words, suggesting that future outcomes are uncertain. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Forward-looking statements with respect to Marathon may include, but are not limited to, levels of revenues, gross margins, income from operations, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of worldwide prices of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities.

PART I

Item 1. and 2. Business and Properties

General

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.

Oil and Natural Gas Production

The following tables set forth daily average net production of liquid hydrocarbons and natural gas for each of the last three years:

Net Liquid Hydrocarbons Production^{(a) (b)}

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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):

Net Productive and Dry Wells Completed^(a)

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:

Gross and Net Acreage

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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:

Refined Product Yields

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.

Properties

The location and general character of the principal oil and gas properties, refineries and gas plants, pipeline systems and other important physical properties of Marathon have been described previously. Except for oil and gas producing properties, which generally are leased, or as otherwise stated, such properties are held in fee. The plants and facilities have been constructed or acquired over a period of years and vary in age and operating efficiency. At the date of acquisition of important properties, titles were examined and opinions of counsel obtained, but no title examination has been made specifically for the purpose of this document. The properties classified as owned in fee generally have been held for many years without any material unfavorably adjudicated claim.

The basis for estimating oil and gas reserves is set forth in “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.

Property, Plant and Equipment Additions

For property, plant and equipment additions, see “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity – Capital Expenditures” on page 40.

Employees

Marathon had 27,007 active employees as of December 31, 2003, including 23,556 MAP employees. Of the total number of MAP employees, 17,139 were employees of Speedway SuperAmerica LLC, most of whom were employees at retail marketing outlets.

Certain hourly employees at the Catlettsburg and Canton refineries are represented by the Paper, Allied-Industrial, Chemical and Energy Workers International Union under labor agreements that expire on January 31, 2006. The same union represents certain hourly employees at the Texas City refinery under a labor agreement that expires on March 31, 2006. The International Brotherhood of Teamsters represents certain hourly employees at the St. Paul Park and Detroit refineries under labor agreements that are scheduled to expire on May 31, 2006 and January 31, 2007, respectively.

Available Information

General information about Marathon, including the Corporate Governance Principles and Charters for the Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Committee on Financial Policy, can be found at www.marathon.com. In addition, Marathon’s Code of Business Conduct and Code of Ethics for Senior Financial Officers is available on the website at www.marathon.com/Values/ Corporate_Governance/. Marathon’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through the website as soon as reasonably practicable after the reports are filed or furnished with the SEC. These documents are also available in hard copy, free of charge, by contacting Marathon’s Investor Relations office. Information contained on Marathon’s website is not incorporated into this Form 10-K or other securities filings.

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Item 3. Legal Proceedings

Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

Natural Gas Royalty Litigation

Marathon was served in two qui tam cases, which allege that federal and Indian lessees violated the False Claims Act with respect to the reporting and payment of royalties on natural gas and natural gas liquids. The first case, U.S. ex rel Jack J. Grynberg v. Alaska Pipeline Co., et al. is primarily a gas measurement case, and the second case, U.S. ex rel Harrold E. Wright v. Agip Petroleum Co. et al, is primarily a gas valuation case. These cases assert that false claims have been filed by lessees and that penalties, damages and interest total more than $25 billion. The Department of Justice has announced that it would intervene or has reserved judgment on whether to intervene against specified oil and gas companies and also announced that it would not intervene against certain other defendants including Marathon. The matters are in the discovery phase and Marathon intends to vigorously defend these cases.

Powder River Basin Arbitration

The U.S. Bureau of Land Management (“BLM”) completed a multi-year review of potential environmental impacts from coal bed methane development on federal lands in the Powder River Basin in Montana and Wyoming. The Agency’s Record of Decision (“ROD”) was signed on April 30, 2003 supporting increased coal bed methane development. Plaintiff environmental and other groups filed four suits in May 2003 in the U.S. District Court for the District of Montana against the BLM alleging the Agency’s environmental impact review was not adequate. Plaintiffs seek a court order enjoining coal bed methane development on federal lands in the Powder River Basin until BLM conducts additional studies on the environmental impact. Marathon has been allowed to intervene as a party in all four of the cases. As the lawsuits to delay energy development in the Powder River Basin progress through the courts, BLM continues to process permits to drill under the ROD. In January 2004, the Court over protests of Plaintiffs, transferred to the District Court of Wyoming, portions of two of the cases dealing with the sufficiency of the environmental impact review as to lands in Wyoming.

Environmental Proceedings

The following is a summary of proceedings involving Marathon that were pending or contemplated as of December 31, 2003, under federal and state environmental laws. Except as described herein, it is not possible to predict accurately the ultimate outcome of these matters; however, management’s belief set forth in the first paragraph under Item 3. “Legal Proceedings” above takes such matters into account.

Claims under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to facilitate the cleanup of hazardous substances without regard to fault. Potentially responsible parties (“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, Marathon is unable to reasonably estimate its ultimate cost of compliance with CERCLA.

Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in the forward-looking statements.

At December 31, 2003, Marathon had been identified as a PRP at a total of 9 CERCLA waste sites. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with all but one of these sites will be under $1 million per site, and most will be under $100,000. Marathon believes that its liability for cleanup and remediation costs in connection with the one remaining site will be under $4 million.

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In addition, there are four sites where Marathon has received information requests or other indications that it may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability.

There are also 125 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland which has retained liability for all costs associated with remediation. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with 15 of these sites will be under $100,000 per site, 43 sites have potential costs between $100,000 and $1 million per site, 16 sites may involve remediation costs between $1 million and $5 million per site, 7 sites have incurred remediation costs of more than $5 million per site, and one additional site has the potential to exceed $5 million. There are 27 sites with insufficient information to estimate future remediation costs.

There is one site that involves a remediation program in cooperation with the Michigan Department of Environmental Quality at a closed and dismantled refinery site located near Muskegon, Michigan. During the next 10 to 20 years, Marathon anticipates spending less than $7 million at this site. Expenditures in 2003 were approximately $225,000, and expenditures in 2004 will be approximately $500,000. Ongoing work at this site is subject to approval by the Michigan Department of Environmental Quality (“MDEQ”), and a risk-based closure strategy is being developed and will be approved by the MDEQ.

MAP has had a pending enforcement matter with the Illinois Environmental Protection Agency and the Illinois Attorney General’s Office since 2002 concerning MAP’s self-reporting of possible emission exceedences and permitting issues related to storage tanks at its Robinson, Illinois refinery. MAP has had periodic discussions with Illinois officials regarding this matter and more discussions are anticipated in 2004.

The Kentucky Natural Resources and Environmental Cabinet issued the MAP Catlettsburg, Kentucky Refinery a Notice of Violation (“NOV”) regarding the Tank 845 rupture which occurred in November of 1999. The tank rupture caused the tank’s contents to be released onto the ground and adjoining retention area. MAP resolved this matter in 2003 for a civil penalty of $120,000 and the entering of an agreed Administrative Order.

In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in the form of an Agreed-to Administrative Order which was finalized and entered in January 2002 and required payment of a $170,000 penalty and reimbursement of past response costs up to $131,000.

In July, 2002, Marathon received a Notice of Enforcement from the State of Texas for alleged excess air emissions from its Yates Gas Plant and production operations on its Kloh lease. The Notices did not compute a penalty or fine for these pending enforcement actions; a tentative settlement for under $200,000 in civil penalties and a Supplemental Environmental Project has been reached and awaits full Commission approval.

In May, 2003, Marathon received a Consolidated Compliance Order & Notice or Potential Penalty from the State of Louisiana for alleged various air permit regulatory violations. This matter has been resolved in principle with the State for a civil penalty of under $150,000 and awaits formal closure with the State.

During the third quarter of 2003, a MAP subsidiary, Ohio River Pipe Line LLC (“ORPL”), entered into Director’s Final Findings and Orders with the Ohio Environmental Protection Agency (“OEPA”). The OEPA had alleged ORPL violations of a stormwater permit and pollution prevention plan during construction of the Cardinal Products Pipeline. The Findings and Orders required compliance with the permit, plan and other requirements, and payment of a $104,738 civil penalty.

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Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

The principal market on which the Company’s common stock is traded is the New York Stock Exchange. Information concerning the high and low sales prices for the common stock as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in “Selected Quarterly Financial Data (Unaudited)” on page F-41.

As of January 31, 2004, there were 61,404 registered holders of Marathon common stock.

The Board of Directors intends to declare and pay dividends on Marathon common stock based on the financial condition and results of operations of Marathon Oil Corporation, although it has no obligation under Delaware law or the Restated Certificate of Incorporation to do so. In determining its dividend policy with respect to Marathon common stock, the Board will rely on the financial statements of Marathon. Dividends on Marathon common stock are limited to legally available funds of Marathon.

On January 29, 2003, Marathon amended the Rights Agreement, dated as September 28, 1999, as amended, between Marathon and National City Bank, as successor rights agent. The Rights Agreement was amended so that the Rights to Purchase Series A Junior Preferred Stock expired on January 31, 2003, more than six years earlier than initially specified in the plan.

Item 6. Selected Financial Data

See page F-49 through F-51.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Marathon Oil Corporation (“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 its 62 percent owned subsidiary, Marathon Ashland Petroleum LLC (“MAP”); and other energy related businesses. The Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Items 1. and 2. Business and Properties, Item 6. Selected Financial Data and Item 8. Financial Statements and Supplementary Data.

Certain sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting the businesses of Marathon. These statements typically contain words such as “anticipates,” “believes,” “estimates,” “expects,” “targets”, “plan,” “project,” “could,” “may,” “should,” “would” or similar words indicating that future outcomes are uncertain. In accordance with “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, which could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Unless specifically noted, amounts for MAP do not reflect any reduction for the 38 percent interest held by Ashland Inc. (“Ashland”).

Overview

Marathon’s overall operating results depend on the profitability of its exploration and production (“E&P”) and refining, marketing and transportation (“RM&T”) segments.

Exploration and Production

E&P segment revenues correlate closely with prevailing prices for crude oil and natural gas. The increase in Marathon’s E&P segment revenues during 2003 tracked the increase in prices for these commodities. The robust prices for crude oil during 2003 were caused in part by increased demand in strengthening economies, particularly in the United States and the Far East, reduced crude oil inventories, as well as civil and political unrest and military actions in various oil exporting countries. The average spot price during 2003 for West Texas Intermediate (WTI), a benchmark crude oil, was $31.06 per barrel – up from an average of $26.16 in 2002 – and ended the year at $32.47.

Natural gas prices were significantly higher in 2003 as compared to 2002. A significant portion of Marathon’s United States lower 48 natural gas production is sold at bid week prices, making this indicator particularly important. The average quarterly bid week prices for 2003 were $6.58, $5.40, $4.97 and $4.58, respectively for the first to fourth quarter. Natural gas prices in Alaska are largely contractual, while natural gas production there is seasonal in nature, trending down during the second and third quarters and increasing during the fourth and first quarters. The other major gas-producing region for Marathon is Europe, where a large portion of Marathon’s gas sales are at contractual prices, making them less subject to European price volatility.

For additional information on price risk management, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 52.

E&P segment income during 2003 was impacted by slightly lower oil-equivalent production – down approximately 6 percent from 2002 levels. 2004 production is expected to decrease about 6 percent from 2003 levels mainly due to sales of non-core properties during 2003. Marathon estimates its 2004 production will average approximately 365,000 barrels of oil equivalent per day (“BOEPD”), excluding the impact of any additional acquisitions or dispositions. While production is expected to remain relatively flat through 2005, significant production growth is expected starting in 2006 from known projects in new core areas and recent exploration successes. Total production is anticipated to grow by more than 3 percent on an average annual basis between 2003 and 2008.

Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world’s major oil and gas producing areas, including OPEC member

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countries. Any substantial decline in such prices could have a material adverse effect on Marathon’s results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development.

E&P operations are subject to various hazards, including acts of war or terrorist acts and the governmental or military response thereto, explosions, fires and uncontrollable flows of oil and gas. 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. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects.

Refining, Marketing and Transportation

MAP refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. RM&T segment income primarily reflects MAP’s income from operations which depends largely on the refining and wholesale marketing margin, refinery throughputs, retail marketing margins for gasoline, distillates and merchandise, and the profitability of its pipeline transportation operations.

The refining and wholesale marketing margin is the difference between the wholesale prices of refined products sold and the cost of crude oil and other feedstocks refined, the cost of purchased products and manufacturing costs. MAP is a purchaser of crude oil in order to satisfy throughput requirements of its refineries. As a result, its refining and wholesale marketing margin could be adversely affected by rising crude oil and other feedstock prices that are not recovered in the marketplace. The crack spread, which is a measure of the difference between spot market gasoline and distillate prices and spot market crude costs, is an industry indicator of refining margins. In addition to changes in the crack spread, MAP’s refining and wholesale marketing margin is impacted by the types of crude oil processed, the wholesale selling prices realized for all the products sold and the level of manufacturing costs. MAP processes significant amounts of sour crude oil which enhances its competitive position in the industry as sour crude oil typically can be purchased at a discount to sweet crude oil. As crude oil production increases in the coming years, heavy, sour crude oil production growth is expected to outpace sweet crude oil production growth , which may translate into higher sour crude oil discounts going forward. Over the last three years, approximately 60% of the crude oil throughput at MAP’s refineries has been sour crude oil. Sales of asphalt increase during the highway construction season in MAP’s market area which is primarily in the second and third calendar quarters. The selling price of asphalt is dependant on the cost of crude oil, the price of alternative paving materials and the level of construction activity in both the private and public sectors. Changes in manufacturing costs from period to period are primarily dependant on the level of maintenance activities at the refineries and the price of purchased natural gas. The refining and wholesale marketing margin has been historically volatile and varies with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products and raw materials.

For additional information on price risk management, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 52.

Additionally, the retail marketing gasoline and distillate margin, the difference between the ultimate price paid by consumers and the wholesale cost of the refined products, including secondary transportation, plays an important part in downstream profitability. Retail gasoline and distillate margins have been historically volatile, but tend to be countercyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include competition, seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations that impact driving conditions. Gross margins on merchandise sold at retail outlets tend to be less volatile than the gross margin from the retail sale of gasoline and diesel fuel. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items, the impact of competition and the level of economic activity in the marketing areas. The profitability of MAP’s pipeline transportation operations is primarily dependant on the volumes shipped through the pipelines. The volume of crude oil that MAP transports is directly affected by the supply of, and refiner demand for, crude oil in the markets served directly by MAP’s crude oil pipelines. Key factors in this supply and demand balance are the production levels of crude oil by producers, the availability and cost of alternative transportation modes, and the refinery and transportation system maintenance levels. The throughput of the refined products that MAP transports is directly affected by the production level of, and user demand for, refined products in the markets served by MAP’s refined product pipelines. In most of MAP’s markets, demand for gasoline peaks during

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the summer driving season, which extends from May through September, and declines during the fall and winter months. The seasonal pattern for distillates is the reverse of this, helping to level overall movements on an annual basis. As with crude, other transportation alternatives and maintenance levels influence refined product movements.

Environmental regulations, particularly the 1990 amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations that may have an adverse effect on margins and financial condition. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.

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 liquefied natural gas (“LNG”) and methanol, primarily in the United States, Europe and West Africa. The profitability of these operations depends largely on commodity prices, volume deliveries, margins on resale gas, and demand. Methanol spot pricing is very volatile largely because global methanol demand is only 30 millions tons and any one major unplanned shutdown or new addition can have a significant impact on the supply-demand balance. Other energy related businesses (“OERB”) operations could be impacted by unforeseen events such as explosions, fires, product spills, inclement weather or availability of LNG vessels. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.

Management’s Discussion and Analysis of Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the year. Actual results could differ from the estimates and assumptions used.

Certain accounting estimates are considered to be critical if a) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and b) the impact of the estimates and assumptions on financial condition or operating performance is material.

Estimated Net Recoverable Quantities of Oil and Gas

Marathon uses the successful efforts method of accounting for its oil and gas producing activities. The successful efforts method inherently relies upon the estimation of proved reserves, both developed and undeveloped. The existence and the estimated amount of proved reserves affect, among other things, whether or not certain costs are capitalized or expensed, the amount and timing of costs depleted or amortized into income and the presentation of supplemental information on oil and gas producing activities. Both the expected future cash flows to be generated by oil and gas producing properties and the expected future taxable income available to realize the value of deferred tax assets, which are discussed further below, rely in part on estimates of net recoverable quantities of oil and gas.

Marathon’s estimation of net recoverable quantities of oil and gas is a highly technical process performed primarily by in-house reservoir engineers and geoscience professionals. During 2003, approximately 35 percent of Marathon’s total proved reserves were prepared, reviewed or validated by third-party petroleum engineering consultants. The results of these third-party reviews were consistent with Marathon’s proved reserve estimates.

Proved reserves are the estimated quantities of oil and gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Estimates of proved reserves are subject to change, either positively and negatively, as additional information becomes available and as contractual, economic and political conditions change. During 2003, net revisions of previous estimates increased total proved reserves by 40 million BOE as a result of 97 million BOE in positive revisions which were partially offset by 57 million BOE in negative revisions.

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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.

Costs incurred for the periods ended December 31, 2003, 2002, and 2001 relating to the development of proved undeveloped oil and gas reserves, including Marathon’s proportionate share of equity investees’ costs incurred, were $780 million, $404 million, and $365 million. As of December 31, 2003, estimated future development costs relating to the development of proved undeveloped oil and gas reserves for the years 2004 through 2006 are projected to be $324 million, $149 million, and $126 million.

Expected Future Cash Flows Generated by Certain Oil and Gas Producing Properties

Marathon must estimate the expected future cash flows to be generated by its oil and gas producing properties to evaluate the possible need to impair the carrying value of those properties. For purposes of impairment evaluation, long-lived assets must be grouped at the lowest level for which independent cash flows can be identified, which is called an “asset group”. An impairment of any one of Marathon’s five largest producing property asset groups could have a material impact on the presentation of financial condition, changes in financial condition or results of operations. Those asset groups – the Alba field offshore Equatorial Guinea, the coal bed natural gas properties of the Powder River Basin, the Brae Area Complex offshore the United Kingdom, Petronius development in the Gulf of Mexico, and Potanay field in the Russian Federation – comprise approximately 49 percent of Marathon’s total proved oil and gas reserves. The expected future cash flows from these asset groups require assumptions about matters such as the prevailing level of future oil and gas prices, estimated recoverable quantities of oil and gas, expected field performance and the political environment in the host country.

Long-lived asset groups held and used in operations must be impaired when the carrying value is not recoverable and exceeds the fair value. Recoverability of the carrying values is determined by comparison with the undiscounted expected future cash flows to be generated by those groups. As of December 31, 2003, no impairment in the value of the Alba field, Powder River Basin, Brae Area Complex, Petronius development or the Potanay field was indicated.

Expected Future Taxable Income

Marathon must estimate its expected future taxable income to assess the realizability of its deferred income tax assets. As of December 31, 2003, Marathon reported net deferred tax assets of $1.155 billion, which represented gross assets of $1.731 billion net of valuation allowances of $576 million.

Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions (particularly as related to prevailing oil and gas prices) and future financial conditions. The estimates and assumptions used in determining future taxable income are consistent with those used in Marathon’s internal budgets, forecasts and strategic plans.

In determining its overall estimated future taxable income for purposes of assessing the need for additional valuation allowances, Marathon considers proved and risk-adjusted probable and possible reserves related to its existing producing properties, as well as estimated quantities of oil and gas related to undeveloped discoveries if, in the judgment of Marathon management, it is likely that development plans will be approved in the foreseeable future. In assessing the propriety of releasing an existing valuation allowance, Marathon considers the preponderance of evidence concerning the realization of the impaired deferred tax asset.

Additionally, Marathon must consider any prudent and feasible tax planning strategies that might minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets, if management has the ability to implement these strategies and the expectation of implementing these strategies if the forecasted conditions actually occurred. The principal tax planning strategy available to Marathon relates to the permanent reinvestment of the earnings of foreign subsidiaries. Assumptions related to the permanent reinvestment of the earnings of foreign subsidiaries are reconsidered annually to give effect to changes in Marathon’s portfolio of producing properties and in its tax profile.

Marathon’s deferred tax assets include $450 million relating to Norwegian net operating loss carryforwards (“NOLs”). Marathon has established a valuation allowance of $420 million against these NOLs. Currently, Marathon generates income from the Heimdal and Vale fields in the Norwegian North Sea. Marathon acquired

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additional interests in Norway in each of the last three years. These interests currently have no proved reserves and generate no income, although some interests hold undeveloped discoveries. To the extent that these interests demonstrate the capability to generate future taxable income, Marathon may be able to release some or all of its $420 million valuation allowance in future periods.

Net Realizable Value of Receivables from United States Steel

As described further in “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity – Obligations Associated with the Separation of United States Steel” on page 43, Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. As of December 31, 2003, Marathon has reported receivables from United States Steel of $613 million, representing the amount of principal and accrued interest on Marathon debt for which United States Steel has assumed responsibility for repayment. Marathon must assess the realizability of these receivables, based on its expectations of United States Steel’s ability to satisfy its obligations. To make this assessment, Marathon must rely on public information about United States Steel. As of December 31, 2003, Marathon has judged the entire receivable to be realizable.

Marathon may continue to be exposed to the risk of nonpayment by United States Steel on a significant portion of this receivable until December 31, 2011. Of the $613 million, $469 million, or 77 percent, relates to industrial revenue bonds that are due in 2011 or later. The Financial Matters Agreement between Marathon and United States Steel provides that, on or before the tenth anniversary of the Separation, which is December 31, 2011, United States Steel will provide for Marathon’s discharge from any remaining liability under any of the assumed industrial revenue bonds.

As of December 31, 2003, Marathon’s cash-adjusted debt-to-capital ratio (which includes debt for which United States Steel has assumed responsibility for repayment) was 33 percent. The assessment of Marathon’s liquidity and capital resources may be impacted by expectations concerning United States Steel’s ability to satisfy its obligations.

If the debt for which United States Steel has assumed responsibility for repayment were excluded from the computation, Marathon’s cash-adjusted debt-to-capital ratio as of December 31, 2003 would have been approximately 28 percent. On the other hand, if the receivable from United States Steel had been written off as unrealizable, the cash-adjusted debt-to-capital ratio as of December 31, 2003 would have been approximately 34 percent. (If United States Steel were unable to satisfy its obligations, other adjustments in addition to the write-off of the receivable may be necessary.)

Net Realizable Value of Inventories

Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, when the cost basis of Marathon’s inventories of liquid hydrocarbons and refined petroleum products exceed market value, Marathon establishes an inventory market valuation (“IMV”) reserve to reduce the cost basis of its inventories to net realizable value. Adjustments to the IMV reserve result in noncash charges or credits to income from operations.

When Marathon Oil Company was acquired in March 1982, prices of liquid hydrocarbons and refined petroleum products were at historically high levels. In applying the purchase method of accounting, inventories of liquid hydrocarbons and refined petroleum products were revalued by reference to current prices at the time of acquisition. This became the new LIFO cost basis of the inventories.

When Marathon acquired the crude oil and refined petroleum product inventories associated with Ashland’s RM&T operations on January 1, 1998, Marathon established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered.

Since the prices of liquid hydrocarbons and refined petroleum products do not correlate perfectly, there is no absolute price threshold below which an IMV adjustment will be recognized. However, generally, Marathon will establish an IMV reserve when crude oil prices fall below $20 per barrel. As of December 31, 2003, with the WTI spotprice at $32.47 per barrel, no IMV reserve was needed.

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Contingent Liabilities

Marathon accrues contingent liabilities for income and other tax deficiencies, environmental remediation, product liability claims and litigation claims when such contingencies are probable and estimable. Marathon’s in-house legal counsel regularly assesses these contingent liabilities. In certain circumstances, outside legal counsel is utilized. For additional information on contingent liabilities, see “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies” on page 45.

Pensions and Other Postretirement Benefit Obligations

Accounting for these benefit obligations involves assumptions related to:

Marathon develops its demographics and utilizes the work of outside actuaries to assist in the measurement of these obligations. In determining the discount rate, Marathon reviews market yields on high-quality corporate debt. The asset rate of return assumption considers the asset mix of the plans, targeted at 75% equity securities and 25% debt securities, past performance and other factors. Compensation increase assumptions are based on historical experience and anticipated future management actions. Marathon reviews actual recent cost trends and projected future trends in establishing health care cost trend rates.

Of the assumptions used to measure the December 31, 2003 obligations and estimated 2004 net periodic benefit cost, the discount rate has the most significant effect on the periodic benefit costs reported for the plans. A .25% basis point decrease in the discount rate of 6.25% for domestic and 5.40% for international would increase pension and other postretirement plan expense by approximately $12 million and $3 million, respectively.

Estimated Fair Value of Asset Retirement Obligations

The fair value of an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. Asset retirement obligations include costs to dismantle and relocate or dispose of production platforms, gathering systems, wells and related structures and restoration costs of land and seabed. Estimates of these costs are developed for each property based upon the type of production structure, depth of water, reservoir characteristics, depth of the reservoir, market demand for equipment, currently available procedures and consultations with construction and engineering professionals. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make estimates and judgments that are subject to future revisions based upon numerous factors, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates, the credit-adjusted risk-free interest rate, changing technology and the political and regulatory environment.

Marathon’s estimation of asset retirement obligations and retirement dates is primarily performed by in-house engineers in consultation with in-house legal and environmental experts. Due to the inherent uncertainties in asset retirement obligations and retirement dates, these estimates are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and as contractual, legal, environmental, economic and technological conditions change.

While assets such as refineries, crude oil and product pipelines, and marketing assets have asset retirement obligations, certain of those obligations are not recognized since the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.

Marathon’s estimates of the ultimate asset retirement obligations are based on estimates in current dollars, inflated to the estimated date of retirement by an annual inflation factor. Sensitivity analysis of the incremental effects of a hypothetical 1% increase in the inflation rate would have resulted in an approximately $28 million increase in the fair value of the asset retirement obligations at December 31, 2003, and an approximately $5 million decrease in 2003 income from operations.

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Estimated Fair Value of Non-Exchange Traded Derivative Contracts

Marathon fairly values all derivative instruments. Derivative instruments are used to manage risk throughout Marathon’s different businesses. These risks relate to commodities, interest rates and to a lesser extent our exposure to foreign currency fluctuations. Marathon uses derivative instruments that are exchange traded and non-exchange traded. Non-exchange traded instruments are referred to as over-the-counter (“OTC”) instruments.

The fair value of exchange traded instruments is based on existing market quotes derived from major exchanges such as the New York Merchantile Exchange. The fair value for OTC instruments such as options and swap agreements is developed through the use of option-pricing models or third party market quotes. The option-pricing models incorporate assumptions related to market volatility, current market price, strike price, interest rates and time value. Marathon utilizes purchased software option-pricing tools, similar to the Black-Scholes model, to fairly value its options related to commodity-based risks. OTC swap agreements are used to manage our exposure to interest rates. Marathon obtains third party dealer quotes to mark-to-market these financial instruments. In addition, Marathon has developed an internal pricing model which takes into consideration the specific contract terms and the forward market for interest rates. This tool is used to test the reasonableness of the third party dealer quotes associated with the OTC swap agreements.

Marathon also fairly values two natural gas long term delivery commitment contracts in the United Kingdom that are accounted for as derivative instruments and recognizes the change in fair value of those contracts on a quarterly basis within income from operations. The fair value is derived from published market data such as the Heren Report that captures the market-based natural gas activity in the United Kingdom. Currently, an 18 month forward pricing curve is utilized as this represents approximately 90% of the market liquidity in that region.

For additional information on market risk sensitivity, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” on page 52.

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Management’s Discussion and Analysis of Income and Operations

Revenues for each of the last three years are summarized in the following table: