The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in this report in Item 8, and the Risk Factors information, which are set forth in Item 1A.

Overview

Anadarko Petroleum Corporation is among the world's largest independent oil and natural gas exploration and production companies. Anadarko's primary line of business is the exploration, development, production, gathering, processing and marketing of natural gas, crude oil, condensate and NGLs. The Company's major areas of operations are located in the United States and Algeria, with additional activity in Brazil, China, Ghana, Indonesia, Mozambique and several other countries.

Anadarko achieved its key operational objectives in 2008, during a year marked by a downturn in the financial markets and a volatile commodity-price environment that included New York Mercantile Exchange (NYMEX) oil prices rising to highs above $140 per barrel, and falling to lows under $40 per barrel. The Company is managing its 2009 capital program consistent with a sustained lower-commodity-price environment. Anadarko ended 2008 with approximately $2.4 billion of cash on hand and retains the availability of its undrawn $1.3 billion revolving credit agreement (RCA), along with access to credit markets. Management expects this liquidity position and cash flow from operations to position the Company to meet its 2009 operational objectives and capital commitments.

Mission and Strategy

Anadarko's mission is to deliver a competitive and sustainable rate of return to shareholders by exploring for, acquiring and developing oil and natural gas resources vital to the world's health and welfare. Anadarko employs the following strategy to achieve this mission:

• Identify and commercialize resources

• Explore in high-potential, proven basins

• Employ global business development approach

• Ensure financial discipline and flexibility

The first portion of this strategy involves Anadarko developing its portfolio of primarily unconventional resources that give the Company a stable base of capital-efficient, predictable and repeatable development opportunities to consistently grow the Company at competitive rates.

Exploring in high-potential, proven and emerging basins worldwide provides the Company with differential growth. Anadarko's exploration success creates value by expanding its future resource potential, while providing the flexibility to manage risk by monetizing discoveries.

Anadarko's global business development approach transfers core skills across the globe to discover and develop world-class resources that are accretive to the Company's performance. These resources help form an optimized-global portfolio where both surface and subsurface risks are actively managed.

A strong balance sheet is essential for the development of the Company's assets, and Anadarko is committed to disciplined investments in its businesses to manage through commodity price cycles. Maintaining financial discipline enables the Company to capitalize on the flexibility of its global portfolio, while allowing the Company to pursue new strategic and tactical-growth opportunities.

Operating Highlights

The Company overcame significant weather events and third-party-related infrastructure issues in 2008 to achieve production growth, reserve additions, and production replacement. Significant operational highlights by area include:

United States Onshore

• Achieved record production in the Rocky Mountain region

• Secured additional takeaway and processing capacity in the Rockies region

• Expanded acreage position and began testing prospects in the Haynesville and Marcellus shale plays, located in East Texas and central Pennsylvania, respectively, as well as the Maverick basin in South Texas

Gulf of Mexico

• Announced a successful appraisal well at Tonga West and approved the Caesar/Tonga complex

• All Anadarko-operated facilities successfully weathered two major hurricanes with only minor, localized surface damage; however some production remained curtailed due to third-party pipeline and infrastructure issues

• Restored production to pre-shut-in levels at Independence Hub within 72 hours of Hurricane Ike

• Restored production on June 16, 2008 to nearly a billion cubic feet per day of natural gas at Independence Hub after a ten-week shut-in due to a third-party export pipeline leak

International

• Announced major discoveries and successful appraisal wells offshore Ghana in and near the Jubilee field

• Announced the Company's first pre-salt discovery in the Campos basin offshore Brazil at the Wahoo prospect

• Achieved 1-billion-barrel production milestone in Algeria

• Acquired six blocks in the West Africa Cretaceous trend located in Sierra Leone and Liberia

Financial Highlights

The Company's 2008 financial highlights include:

• Generated $6.4 billion of cash flow from continuing operating activities compared to $2.8 billion in 2007 due to higher commodity prices

• Announced a $5 billion share repurchase program and completed $600 million of repurchases in the third quarter of 2008

• Completed an initial public offering through the issuance of 20.8 million common units of its formerly wholly-owned midstream subsidiary, WES, for net proceeds of $321 million

• Closed the divestitures of the Company's interest in the Peregrino field offshore Brazil and the Kaskida discovery in the deepwater Gulf of Mexico for before-tax proceeds of approximately $1.8 billion

• Reduced year-end debt-to-capital ratio to 39.6%. Reduced debt by $2.4 billion in 2008, including repayment of the Company's 2006 acquisition financing and approximately $580 million of floating rate notes due in 2009

• Closed 2008 with $2.4 billion of cash on hand

• Operated in a volatile commodity-price environment that included NYMEX oil prices rising to highs above $140 per barrel, and falling to lows under $40 per barrel

The following discussion pertains to Anadarko's financial condition, results of operations and changes in financial condition. Unless noted otherwise, the following information relates to continuing operations and excludes the discontinued Canadian operations. The primary factors that affect the Company's results of operations include, among other things, commodity prices for natural gas, crude oil and NGLs, production volumes, the Company's ability to find additional oil and natural gas reserves, as well as the cost of finding reserves and changes in the levels of costs and expenses required for continuing operations. Unless the context otherwise requires, the terms "Anadarko" or "Company" refer to Anadarko Petroleum Corporation and its consolidated subsidiaries. Following is an index by major category of discussion including a brief description of contents:

Results of Continuing Operations

millions except per share amounts and percentages 2008 2007 2006(2) Financial Results
Sales revenues $ 14,640 $ 11,132 $ 10,116 Gains on divestitures and other, net 1,083 4,760 114

Total revenues and other 15,723 15,892 10,230 Costs and expenses 9,561 8,545 5,849 Other (income) expense 816 1,018 644 Income tax expense 2,148 2,559 1,263 Income from continuing operations $ 3,198 $ 3,770 $ 2,474 Earnings per common share-diluted $ 6.84 $ 8.05 $ 5.33 Average number of common shares outstanding-diluted 468 468 464

Operating Results
Adjusted EBITDAX(1) $ 10,874 $ 11,217 $ 7,203 Total proved reserves (MMBOE) 2,277 2,431 3,011 Annual sales volumes (MMBOE) 206 211 178

Capital Resources and Liquidity
Cash provided by operating activities $ 6,447 $ 2,766 $ 4,671 Capital expenditures 4,881 3,990 4,212 Total debt 12,339 14,747 22,991 Stockholders' equity $ 18,795 $ 16,364 $ 12,403 Debt to total capitalization ratio 39.6 % 47.4 % 65.0 %

(1) See Segment Analysis-Adjusted EBITDAX for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from continuing operations before income taxes, which is presented in accordance with GAAP.

(2) Anadarko's financial and operating results for 2006 include the operating results of Kerr-McGee and Western since the dates of their acquisitions on August 10, 2006, and August 23, 2006, respectively.

Financial Results

Income from Continuing Operations Anadarko's income from continuing operations for 2008 totaled $3.2 billion, or $6.84 per share (diluted), compared to income from continuing operations for 2007 of $3.8 billion, or $8.05 per share (diluted). Anadarko had income from continuing operations in 2006 of $2.5 billion, or $5.33 per share (diluted). The decrease in income from continuing operations for 2008 compared to 2007 was primarily due to a decrease in gains on divestitures and higher costs and expenses, partially offset by higher natural gas, oil and NGLs sales, including the impact of derivatives, lower interest expense and lower income tax expense. The increase in 2007 income from continuing operations compared to 2006 was primarily due to gains on divestitures and higher sales volumes, partially offset by the impact of lower natural gas and oil and condensate prices, higher costs and expenses, including other taxes related to an Algerian exceptional profits tax, and higher interest expense. In 2008, the higher sales revenues and costs and expenses were due primarily to the impact of higher commodity prices, higher exploration expense related to impairments of unproved properties and higher other taxes related to the higher commodity prices. In 2007, the higher sales volumes and costs and expenses were due primarily to the impact of operations acquired with the third quarter 2006 acquisitions.

                                 Sales Revenues



                                                                     † vs.                  † vs.
millions except percentages                    2008        2007      2008         2006      2007
Gas sales                                    $  6,254    $  4,119       52 %    $  4,186       (2 )%
Oil and condensate sales                        6,502       4,807       35         4,618        4
Natural gas liquids sales                         802         719       12           594       21
Gathering, processing and marketing sales       1,082       1,487      (27 )         718      107

Total                                        $ 14,640    $ 11,132       32      $ 10,116       10

Anadarko's sales revenues for 2008 increased when compared to 2007 due to higher oil and condensate, natural gas and NGLs commodity prices and unrealized gains on derivatives, partially offset by lower sales volumes associated with properties that were divested in 2007. The increase in 2007 compared to 2006 was primarily due to higher sales volumes, partially offset by significantly lower natural gas and oil and condensate prices.

The Company's sales revenues for 2008, 2007 and 2006 include $930 million, $(1,100) million and $895 million, respectively, related to net unrealized gains (losses) on derivatives used to manage price risk on natural gas, crude oil, condensate and NGLs sales. The significant fluctuations in unrealized gains (losses) are due primarily to an increase in Anadarko's derivative portfolio as a result of the 2006 acquisition of Kerr-McGee, as well as the discontinuance of hedge accounting effective January 1, 2007. The majority of the unrealized gains recorded in 2006 related to derivatives assumed with the Kerr-McGee acquisition. Any realization of these gains or losses is expected to be substantially offset by the value realized from that portion of the Company's production covered by the derivative instruments.

               Analysis of Oil and Gas Operations Sales Revenues

The following table provides a summary of the effects of changes in volumes,
prices and derivatives gains and losses on Anadarko's sales revenues for the
year ended December 31, 2008 compared to 2007 and 2006.



                                                     Natural        Oil and
 millions                                              Gas         Condensate      NGLs
 2006 sales revenues                                 $  4,186     $      4,618     $ 594
 Changes associated with sales volumes                    858              481        26
 Changes in prices, excluding derivatives                (282 )            659       108
 Changes in realized derivative gains and losses          331              (40 )      (9 )
 Changes in unrealized derivative gains and losses       (974 )           (911 )      -

 2007 sales revenues                                 $  4,119     $      4,807     $ 719
 Changes associated with sales volumes                    300             (802 )     (63 )
 Changes in prices, excluding derivatives               1,436            1,838       146
 Changes in realized derivative gains and losses         (368 )           (514 )      -
 Changes in unrealized derivative gains and losses        767            1,173        -

 2008 sales revenues                                 $  6,254     $      6,502     $ 802

The Company utilizes derivative instruments to manage the risk of a decrease in the market prices for its anticipated sales of natural gas, crude oil, condensate and NGLs. This activity is referred to as price risk management. The impact of price risk management (including realized and unrealized gains and losses) increased revenues $586 million in 2008, decreased revenues $472 million in 2007 and increased revenues $1,131 million in 2006. See Energy Price Risk under Part II, Item 7A and Note 8-Derivative Instruments under Part II, Item 8 of this Form 10-K.

                Analysis of Oil and Gas Operations Sales Volumes



                                                                       † vs.               † vs.
                                                       2008    2007    2008        2006    2007
Barrels of Oil Equivalent (MMBOE except
percentages)
United States                                           179     180       (1 )%     147       22 %
Algeria                                                  21      24      (13 )       23        4
Other International                                       6       7      (14 )        8      (13 )

Total                                                   206     211       (2 )      178       19

Barrels of Oil Equivalent per Day (MBOE/d except
percentages)
United States                                           489     492       (1 )      404       22
Algeria                                                  58      65      (11 )       64        2
Other International                                      16      20      (20 )       21       (5 )

Total                                                   563     577       (2 )      489       18

Anadarko's daily sales volumes increased in 2008 compared to 2007, excluding 2007 divested property volumes of 45 MBOE/d, primarily due to an increase in the United States of 38 MBOE/d related to higher sales volumes in the Rockies due to improved drilling efficiencies allowing for more overall drilling and the Gulf of Mexico. The sales volume increase in the Gulf of Mexico was realized despite prolonged repairs of third-party downstream infrastructure at the end of 2008 as a result of the 2008 hurricane activity. Volumes in Algeria decreased 7 MBOE/d primarily as a result of lower production due to maintenance, a statutory shutdown and current production constraints implemented by OPEC in the fourth quarter of 2008. During 2007, Anadarko's daily sales volumes increased compared to 2006 primarily due to higher sales volumes of 138 MBOE/d

associated with the full-period impact of the 2006 acquisitions and higher sales volumes in the Gulf of Mexico of 18 MBOE/d associated with production start up at Independence Hub in the second half of 2007, partially offset by a decrease in sales volumes of 64 MBOE/d associated with the impact of 2007 divestitures in the onshore United States, the Gulf of Mexico and Qatar.

Sales volumes represent actual production volumes adjusted for changes in commodity inventories. Anadarko employs marketing strategies to help manage volumes and mitigate the effect of price volatility, which is likely to continue in the future.

             Natural Gas Sales Volumes, Average Prices and Revenues



                                                                    † vs.                           † vs.
                                       2008        2007             2008             2006           2007
                                                                (Percentages)                   (Percentages)
United States
Sales volumes-Bcf                         750         698                   7 %         558                25 %
    MMcf/d                              2,049       1,912                   7         1,529                25
Price per Mcf, excluding
derivatives                           $  7.65     $  5.74                  33       $  6.14                (7 )
Realized gains (losses) on
derivatives                              0.19        0.73                 (74 )        0.33               121

                                         7.84        6.47                  21          6.47                -
Unrealized gains (losses) on
derivatives                              0.50       (0.57 )               188          1.03              (155 )

Total                                 $  8.34     $  5.90                  41       $  7.50               (21 )
Gas sales revenues (millions)         $ 6,254     $ 4,119                  52       $ 4,186                (2 )

The Company's daily natural gas sales volumes increased in 2008 compared to 2007, excluding 2007 divested property volumes of 156 MMcf/d, primarily due to higher sales volumes in the Gulf of Mexico of 175 MMcf/d as a result of the start up of the Independence Hub and increased production in the Rockies of 162 MMcf/d due to improved drilling efficiencies allowing for more overall drilling, partially offset by decreased production in the Southern Region of 44 MMcf/d. Anadarko's daily natural gas sales volumes in 2007 increased when compared to 2006. The increases were primarily due to higher sales volumes associated with the 2006 acquisitions of 491 MMcf/d and higher sales volumes of 106 MMcf/d in the Gulf of Mexico related to the start up of the Independence Hub, partially offset by decreases in sales volumes of 224 MMcf/d associated with 2007 divestitures in the onshore United States and Gulf of Mexico. Production of natural gas is generally not directly affected by seasonal swings in demand.

Excluding the impact of gains and losses on derivatives, Anadarko's average natural gas price for 2008 increased when compared to 2007. The relative difference in 2008 and 2007 prices is primarily attributable to strong prices in the first half of 2008. The strong price in 2008 stemmed from lower year-over-year natural gas storage volumes coupled with lower liquefied natural gas volumes available to the United States consumer, both of which were caused principally by increased demand and pricing in both Europe and Asia. Excluding the impact of both realized and unrealized gains and losses on derivatives, Anadarko's average natural gas price for 2007 decreased when compared to 2006. The lower natural gas price is attributable to a higher than average North America natural gas storage level in 2007, the full year effect in 2007 of the return of Gulf of Mexico gas production capacity in 2006 that was damaged during the 2005 hurricane season and a significant increase in liquefied natural gas supply into the United States. As of December 31, 2008, the Company has implemented price risk management on about 24% of its anticipated natural gas wellhead sales volumes for 2009.

      Crude Oil and Condensate Sales Volumes, Average Prices and Revenues



                                                                     † vs.                            † vs.
                                     2008           2007             2008              2006           2007
                                                                 (Percentages)                    (Percentages)
United States
Sales volumes-MMBbls                     40             48                 (17 )%          39                23 %
    MBbls/d                             108            130                 (17 )          108                20
Price per barrel, excluding
derivatives                        $  96.20       $  66.64                  44        $ 59.41                12
Realized gains (losses) on
derivatives                           (8.15 )         1.35                (704 )         2.64               (49 )

                                      88.05          67.99                  30          62.05                10
Unrealized gains (losses) on
derivatives                            8.18         (10.75 )               176           6.54              (264 )

Total                              $  96.23       $  57.24                  68        $ 68.59               (17 )
Algeria
Sales volumes-MMBbls                     21             24                 (13 )           23                 4
    MBbls/d                              58             65                 (11 )           64                 2
Price per barrel, excluding
derivatives                        $  98.99       $  75.50                  31        $ 65.55                15
Realized gains (losses) on
derivatives                           (5.86 )           -                   NM             -                 NM

                                      93.13          75.50                  23          65.55                15
Unrealized gains (losses) on
derivatives                            9.14          (5.91 )               255             -                 NM

Total                              $ 102.27       $  69.59                  47        $ 65.55                 6
Other International
Sales volumes-MMBbls                      6              7                 (14 )            8               (13 )
    MBbls/d                              16             20                 (20 )           21                (5 )
Total average price per barrel     $  85.51       $  59.91                  43        $ 48.58                23
Total
Sales volumes-MMBbls                     67             79                 (15 )           70                13
    MBbls/d                             182            215                 (15 )          193                11
Total price per barrel,
excluding derivatives              $  96.15       $  68.68                  40        $ 60.28                14
Realized gains (losses) on
derivatives                           (6.72 )         0.82                (920 )         1.48               (45 )

                                      89.43          69.50                  29          61.76                13
Unrealized gains (losses) on
derivatives                            7.78          (8.31 )               194           3.67              (326 )

Total                              $  97.21       $  61.19                  59        $ 65.43                (7 )
Total oil and condensate sales
revenues (millions)                $  6,502       $  4,807                  35        $ 4,618                 4

NM-not meaningful

Anadarko's daily crude oil and condensate sales volumes were lower in 2008 compared to 2007, excluding 2007 divested property volumes of 15 MBbls/d, primarily due to lower crude oil sales volumes of 13 MBbls/d in the Gulf of Mexico due to 2008 hurricane activity, lower crude oil sales volumes of 7 MBbls/d in Algeria, primarily as a result of lower production due to maintenance, a statutory shutdown and current production constraints implemented by OPEC in the fourth quarter of 2008, and lower crude oil sales volumes of 3 MBbls/d in Alaska, partially offset by higher crude oil sales volumes of 5 MBbls/d in the Rockies. Anadarko's daily crude oil and condensate sales volumes for 2007 were up when compared to the same period of 2006. The increases in 2007 compared to 2006 were primarily due to an increase in sales volumes of 48 MBbls/d associated with the 2006 acquisitions, partially offset by a decrease in sales volumes of 20 MBbls/d associated with 2007 divestitures in the onshore United States, the Gulf of Mexico and Qatar and a decrease in Venezuelan sales volumes due to contract changes in late 2006. Production of oil usually is not affected by seasonal swings in demand.

Excluding the impact of gains and losses on derivatives, Anadarko's average crude oil price for 2008 increased when compared to 2007. Crude oil prices were strong in the first half of 2008, primarily due to limited excess production capacity, heightened geopolitical tension and increased demand in Asia; particularly China and

India. Excluding the impact of both realized and unrealized gains and losses on derivatives, Anadarko's average crude oil price for 2007 increased when compared to 2006. The higher crude oil prices were attributed primarily to additional . . .