Apache Corporation, a Delaware corporation formed in 1954, is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, our exploration and production operations are focused in the Gulf of Mexico, the Gulf Coast, East Texas, the Permian basin, the Anadarko basin and the Western Sedimentary basin of Canada. Outside of North America, we have exploration and production operations onshore Egypt, offshore Western Australia, offshore the United Kingdom (U.K.) in the North Sea (North Sea), and onshore Argentina. We also have exploration interests on the Chilean side of the island of Tierra del Fuego.

The following discussion should be read together with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements, which are included in Item 8 of this Form 10-K, and the Risk Factors information, which are set forth in Item 1A of this Form 10-K.

Overview

Apache's 2008 results were significantly impacted by several events:

• A drop in demand related to the slowing global economy caused fourth-quarter oil and gas prices to drop sharply.

• Two major uncontrollable events curtailed our production:

• hurricanes in the Gulf of Mexico, and

• an explosion on a pipeline that transports all of our gas production in Australia.

• A non-cash write-down of the carrying value of our U.S., U.K. North Sea, Canadian and Argentine proved oil and gas properties, necessitated by low commodity prices in effect at year-end (discussed below).

Crude Oil and Natural Gas Prices

The oil and gas industry as a whole experienced a year of extremes during 2008. Crude oil and natural gas prices climbed precipitously in the first half of the year, only to pull back in the third quarter before collapsing in the fourth quarter. Apache monthly average realized prices during the summer reached $118.38 per barrel and $9.12 per thousand cubic feet (Mcf). Our December average realized prices were $36.45 per barrel and $4.75 per Mcf. February 2009 indices indicate that prices are trending below December's averages as the global economy and demand continue to weaken.

Crude Oil and Natural Gas Production

Apache's 2008 consolidated production declined five percent from 2007 on a barrel of oil equivalent (boe) basis. Our production would have increased over 2007 levels had it not been for the impact of the following:

• U.S. production was affected by wells shut-in because of, and damage caused by, Hurricanes Gustav and Ike. While we plan to restore nearly all of the production during the second quarter of 2009, the timing in many instances is pipeline dependent and, therefore, beyond our control. See Operating Highlights in this Item 7.

• In June 2008, a pipeline explosion at the Varanus Island gas processing and transportation hub offshore Western Australia disrupted gas and oil sales, reducing 2008 production. We plan to have all of the volumes restored in the first half of 2009. See Operating Highlights in this Item 7.

Earnings and Cash Flow

From an earnings perspective, we had our historical best and worst quarters ever, just one quarter apart. The fourth-quarter price collapse and associated $3.6 billion non-cash after-tax write-down nearly eliminated 2008 nine-month earnings that totaled $3.7 billion dollars or $10.84 per common diluted share. The write-down reduced earnings for the year to $706 million, or $2.09 per share.

Record commodity prices in the first half of 2008 drove record cash provided by operating activities of $7.1 billion and record oil and gas revenues of $12.4 billion, both of which were unaffected by the write-down. They were, however, affected by falling commodity prices, most notably in the fourth quarter of 2008. Key financial indicators for each quarter and the year of 2008 are noted below:

                                                          2008 Key Financial Indicators, by Quarter
                                         First           Second            Third            Fourth
                                        Quarter          Quarter          Quarter           Quarter          Full Year
                                                            (In thousands, except realized price)

Oil and Gas Revenues                  $ 3,177,949      $ 3,904,118      $ 3,368,882      $   1,876,890      $ 12,327,839

Average Realized Oil Price            $     89.25      $    110.32      $    101.04      $       50.69      $      87.80
Average Realized Gas Price            $      6.42      $      8.09      $      7.43      $        4.76      $       6.70
Income Attributable to Common Stock   $ 1,020,093      $ 1,443,809      $ 1,189,405      $ *(2,947,033 )    $   *706,274

Cash from operating activities        $ 1,808,404      $ 1,929,509      $ 2,290,655      $   1,036,776      $  7,065,344

* Includes a $3.6 billion (after-tax) non-cash write-down in the carrying value of oil and gas properties.

Operating and Drilling Costs

Costs were a challenge for Apache and our industry in 2008 and are expected to remain so in 2009. Drilling, service and acquisition costs, which have increased steadily since the industry's last downturn in 2001, reached unprecedented levels in 2008. Also, in the U.S., activity to repair damage caused by Gulf of Mexico hurricanes over the last few years has contributed to increased demand and costs. Even though we have seen a sharp drop in commodity prices, costs have fallen less rapidly pressuring operating margins. We believe costs will ultimately adjust to the current oil and gas price environment, but until they do, our operating margins and drilling costs will continue to be pressured.

Financial Position and 2009

We believe we are well positioned to take advantage of opportunities that will invariably present themselves in the current business environment. We enter 2009 with a debt-to-capitalization ratio of 23 percent, after consideration of the non-cash write-down. We had over $1.5 billion in cash and short-term investments and $2.3 billion availability on our lines of credit at the close of the year. In a tightening credit market, we believe Apache's single-A debt ratings will provide a competitive advantage in accessing capital. Our 2008 return on capital employed and return on equity were four percent and five percent, respectively, after taking into effect the $5.3 million non-cash write-down.

In 2009, we are projecting production growth driven by multi-year projects coming on-line during the year (discussed below in Operational Highlights). We plan to hold our capital expenditures, currently planned at 50 percent below 2008 spending levels, in line with our operating cash flows. We will continue to monitor capital spending closely based on actual and projected cash flow estimates and intend to scale back spending further should commodity prices remain at current levels or fall further.

For an in-depth discussion of Apache's long-term growth strategy, please refer to Part 1, Items 1 and 2. Business and Properties of this Form 10-K.

Full-Cost Accounting and 2008 Write-down in Net Oil and Gas Property Assets

The Company follows the full-cost method of accounting as allowed by the Securities and Exchange Commission (SEC). Under the full-cost method of accounting, a ceiling test must be performed each quarter, for each country. The test establishes a limit (ceiling), on the carrying value of proved oil and gas properties. This carrying value (net book value and the related deferred income taxes) may not exceed the ceiling. The ceiling limitation is the estimated after-tax future net cash flows from proved oil and gas reserves, excluding future

expected cash outflows associated with settling asset retirement obligations accrued on the balance sheet. The estimate of after-tax future net cash flows is discounted at 10 percent per annum and calculated using both commodity prices and costs in effect at the end of the period, held flat for the life of the properties, except where future oil and gas sales are covered by physical contract terms or by derivative instruments that qualify, and are accounted for, as cash flow hedges. If capitalized costs (carrying value) exceed this limit, the excess is charged to expense and reflected as additional Depletion, Depreciation and Amortization (DD&A) during the period.

In December 2008, the SEC released the final rule for "Modernization of Oil and Gas Reporting," which will permit reporting of oil and gas reserves using an average price based upon the prior 12-month period rather than year-end prices. The new rule becomes effective for the quarter ended December 31, 2009. See Note 1- Summary of Significant Accounting Policies in this Form 10-K.

Despite record realized prices and record revenues for 2008, the low oil and gas prices in effect at the end of the year resulted in an aggregate $5.3 billion ($3.6 billion net of tax) non-cash write-down of the carrying value of Company's U.S., U.K. North Sea, Canadian and Argentine proved oil and gas properties. If oil and gas prices fall below year-end levels, additional write-downs of oil and gas properties may occur. See Note 1 - Summary of Significant Accounting Policies in this Form 10-K.

Operating Highlights

We made considerable operational progress during the year, which we believe adds to our platform for long-term profitable growth in spite of hurricanes in the Gulf of Mexico and a gas pipeline explosion at the Varanus Island gas processing and transportation hub offshore Western Australia. Key operational highlights include:

U.S. Gulf Coast

Gulf Coast focused on an active drilling program and restoring production impacted by the 2005 and 2008 hurricanes. In addition to drilling wells, the region also performed 358 workover and recompletion operations during 2008. Significant events affecting Gulf Coast operations include:

Development Projects

• At Ewing Banks 826, we completed four wells during the first half of 2008 and increased production to 6,315 b/d, up from 700 b/d at the beginning of the year. We own a 100 percent working interest in the field.

Exploration Projects

• In June 2008, we had a key discovery at the Geauxpher prospect located on Garden Banks Block 462 in deepwater Gulf of Mexico. Apache generated the prospect and has a 40-percent working interest. Mariner Energy, Inc. is the designated operator of the block with a 60-percent working interest. A delineation well was drilled in December 2008, extending the productive reservoir limits. We forecast the initial discovery to be online in the second quarter of 2009. Additional potential on the block is expected to be tested by further drilling.

Hurricanes

• During the third quarter of 2008, Hurricanes Gustav and Ike damaged onshore and offshore production and transportation facilities in our Gulf Coast region. Although most of our offshore operated platforms escaped with minor damage, we did lose four Apache-operated and two non-operated platforms. Our ability to transport and process our crude oil and natural gas production was also impacted by damages to third-party pipelines and processing facilities. The impact of the hurricanes on 2008 operations and results follows:

Production - Wells shut-in as a result of the hurricanes reduced 2008 production by an estimated 54.6 MMcf/d and 6,941 b/d. A substantial part of Apache's net production shut-in by the storm was restored by the end of 2008, with only 7,700 b/d and 83 MMcf/d remaining offline. While we plan to restore nearly all of the production by mid-year 2009, the timing in many instances is beyond our control since we

are awaiting repairs to third-party pipelines and facilities. All but approximately 1,100 boe per day of production will ultimately be restored.

Financial Results - The impact of the hurricanes on our 2008 financial results was an estimated $410 million of lower crude oil and natural gas revenues. We also incurred approximately $75 million of expenditures for repair, redevelopment and abandonment of properties damaged by the hurricanes. The Company anticipates an additional $170 to $190 million of costs, most of which are likely to occur in 2009. A majority of these costs will be recovered through insurance, as discussed below.

Insurance Coverage - The Company carries property damage insurance through Oil Insurance Limited (OIL) for windstorm damage in the Gulf of Mexico of $250 million after reaching a $100 million deductible per event. The deductible will be scaled down based on the Company's working interest in the damaged properties and is anticipated to be $80 million. The $250 million in coverage will be prorated downward if total claims received by OIL for Hurricane Ike exceed their aggregate limit per event of $750 million. In December 2008, OIL indicated that losses for Hurricane Ike will likely exceed the aggregate limit by an amount that would cause insurance payments to be 80 percent of amounts claimed; however, the final percentage will not be known until all claims have been submitted to OIL. In addition, Apache has $150 million of property damage and business interruption insurance through the London market subject to a $350 million deductible that can be met with property damage and qualifying business interruption losses.

Egypt

In Egypt, we had a steady stream of significant discoveries during the year across basins and plays, completing 236 of 260 wells for a 91-percent success rate. The region also conducted 701 workovers and recompletions and made significant progress on the completion of several major growth projects that will underpin future production growth. Notable successes during the year include:

Development Projects

• In the Khalda concession, two additional Salam gas processing trains, trains three and four, and an associated Apache pipeline compression project on the Western Desert Northern Gas Pipeline are forecasted to add additional net production of 100 MMcf/d and 5,000 b/d when fully operational in the second quarter of 2009. The third processing train commenced operation on December 4, 2008. Commissioning with first gas from the fourth processing train is projected to commence during the first quarter of 2009.

• We drilled 203 waterflood wells across several concessions during 2008, increasing gross oil production from these waterflood projects 55 percent or 27,000 b/d when compared to 2007 production levels. Also, we believe that several discoveries (discussed below) in a new area called the Heba Ridge, which is adjacent to the Asala Ridge waterflood area in the East Bahariya concession, will add significantly to our inventory of waterflood projects in the concession.

Exploration Discoveries

• During 2008, Apache announced that the Hydra-1X exploration well in Egypt's Western Desert test-flowed 76.6 MMcf/d and 2,813 b/d from the Deep Jurassic and overlying AEB-6 formations. The Hydra 4X well appraised this discovery. Apache has a 100-percent contractor interest in the Shushan "C" concession and is in the process of negotiating a Gas Sales Agreement with the Egyptian General Petroleum Corporation (EGPC) and, when completed, will file to establish a development lease.

• On July 30, 2008, Apache announced that the Heqet-2 well in the Greater Khalda area in Egypt's Western Desert tested 2,100 b/d from the Jurassic Safa formation at a depth of 14,700 feet. We also announced that the Umbarka-174 well tested 4,300 b/d in the main AEB field in the north central portion of the Greater Khalda area. Both wells are currently producing, and development of these fields continues. In October 2008, we announced the WKAL-C-1X discovery on the West Kalabsha concession. The well tested 4,746 b/d and 4.4 MMcf/d in the Jurassic Safa formation. The WKAL-C-1X discovery represents the westernmost oil ever

discovered in Egypt, confirming our exploration model for this area of the Faghur Basin. Apache has a 100 percent contractor interest in both the Khalda and West Kalabsha concessions.

• During 2008, several new oil fields were discovered in the Bahariya formation in the East Bahariya concession. The EBAH-C-1X oil discovery identified a new area called the Heba Ridge. The initial discovery and three additional development wells were drilled in the EBAH-C field during 2008 and all were producing at year-end. A total of 40 wells are planned to fully develop the EBAH-C field. Three additional exploration discoveries in the East Bahariya concession found Bahariya oil pay in separate fields. The initial wells are expected to commence production during early 2009. Each of these discoveries will add significantly to our inventory of water-flood projects in the concession.

• Also in 2008, the Phiops-1X exploration well on the Kalabsha development lease in the Khalda area encountered a potential 374 foot oil column with 173 feet of logged pay in a secondary objective, the Cretaceous Alam El Bueib formation. The well will be tested in early 2009 and is expected to provide a significant oil reserve addition.

• In early 2009, we formally announced three new December 2008 field discoveries in Egypt's Western Desert that tested an aggregate 80 MMcf/d and 5,909 b/d. The Sultan-3X located on the Khalda Offset Concession test-flowed 5,021 b/d and 11 MMcf/d from three commingled intervals in the Safa formation. The two other discoveries, the Adam-1X and the Maggie-1X, discovered new gas-condensate fields on the Matruh development lease north of the Sultan discovery. Apache has a 100-percent contractor interest in both of the concessions. We anticipate completion of Sultan-3X as an oil well prior to the end of first-quarter 2009, and completion of Adam-1X and Maggie-1X by year-end 2009.

Australia

In Australia, we had two notable discoveries, the Halyard-1 and Brulimar-1 as well as continued appraisal success at Julimar and Bambra. We also progressed on several major long lead-time development growth projects, including the Van Gogh and Pyrenees developments. In the Julimar-Brunello area on Australia's Northwest Shelf, we drilled three successful appraisal wells that will allow us to pursue a development strategy after completing our assessment of commercial options. Also, our subsidiaries made considerable progress in restoring operations at the Varanus Island gas processing and transportation hub, which sustained damage from a gas pipeline explosion in June 2008. Lastly, on January 6, 2009, we secured a 154 Bcf, seven-year gas sales contract that enabled us to reinstate our Reindeer development program. These discoveries and developments are discussed in more detail below.

Development and Appraisal Projects

• We have several large development projects underway in Australia. The Van Gogh and Pyrenees developments remain on schedule to deliver first production in 2009 and 2010, respectively, each with projected net rates of 20,000 b/d. Our Reindeer development program was reinstated following signing of a gas-supply contract (discussed below) and is scheduled to deliver approximately 60 MMcf/d net to Apache in late 2011. Construction of pipeline and processing infrastructure is scheduled to commence in 2009.

• On January 6, 2009, the Company announced that it had signed a contract to supply natural gas from the Reindeer field to CITIC Pacific's Sino Iron project in Western Australia. The terms call for Apache and its joint venture partner to supply 154 billion cubic feet of gas over seven years beginning in the second half of 2011. Apache owns a 55 percent interest in the field. The gas will be supplied through a new 65-mile offshore pipeline and a new onshore sales gas processing facility at Devil Creek.

• Appraisal of the Julimar-Brunello area on Australia's Northwest Shelf progressed with three appraisal wells. In January 2008, we announced the Brulimar-1 discovery, which encountered 113 feet of net pay in the Upper Triassic Mungaroo sandstone. In April, we announced the Julimar Southeast-1 discovery, which logged 195 feet of net pay across five intervals of the Triassic Mungaroo sandstone. In May, we announced the Julimar Northwest-1 discovery, which logged 43 feet of net pay in the J-17 Triassic Mungaroo sandstone. We have now drilled seven discoveries in the complex. We plan to complete our appraisal program by mid-

year and pursue a development strategy in the second half of 2009 after completing our assessment of commercial options. The Julimar development will not require funding until we determine which market is best suited for the asset. Apache is evaluating LNG options as well as domestic-market options for Julimar gas. Apache owns a 65 percent interest in and operates the Julimar-Brunello complex.

Exploration Discoveries

• In April, we announced the Halyard-1 discovery on Australia's WA-13-L block, which test-flowed 68 MMcf/d. We are currently in the development design phase that includes consideration of a sub-sea gathering line from Halyard to an existing pipeline at our East Spar field, 10 miles to the southeast, from which the gas can be transported to Varanus Island for processing. Using our existing infrastructure would accelerate development of the field and first sales. Apache obtained governmental approval for the Halyard Field development during the third quarter of 2008, and we are working toward first production in 2010. Apache has a 55 percent interest in and operates the block.

• We are currently evaluating the results of wells drilled in 2008 and seismic information to assess the future potential in the Gippsland basin. All six wells drilled in 2008 were either dry or non-commercial.

Varanus Island

• On June 3, 2008, subsidiaries of the Company reported a gas pipeline explosion at the Varanus Island gas processing and transportation hub offshore Western Australia, which shut-in production at the John Brookes field and Harriet Joint Venture. When fully operational, the Island's operations process approximately 195 MMcf/d and 5,400 b/d, net to Apache subsidiaries. On August 5, 2008, partial production was reestablished from the John Brookes field, and by year-end was at greater than 80 percent pre-incident levels. The Harriet Joint Venture gas facilities are located adjacent to the pipeline explosion and required more significant repairs to restore operation. A portion of our gas production from the Harriet Joint Venture was restored in December 2008 and is projected to be fully restored in the first half of 2009. Harriet Joint Venture oil production is projected to be fully restored in the first quarter of 2009. The John Brookes field accounted for approximately 60 percent and 25 percent of the island's pre-incident natural gas and oil production, respectively. Production from the Harriet Joint Venture accounted for the remaining 40 percent and 75 percent of the island's pre-incident natural gas and oil production, respectively. Company subsidiaries operate the facilities and own a 68.5 percent interest in the Harriet Joint Venture and a 55 percent interest in the John Brookes field. Company subsidiaries maintain replacement cost insurance, subject to a deductible of approximately $7 million, with adequate limits to cover fully their share of the estimated cost of restoring the Varanus Island facilities.

Canada

During 2008, the Canadian region had an active development drilling program and commenced pursuit of an emerging shale-gas play in northeast British Columbia. Notable activities during the year include:

Exploration Projects

• During 2008, the Company completed a total of seven horizontal wells in the Ootla shale-gas play, located in northeast British Columbia. December gross production averaged 2.5 MMcf/d. Current plans for the Ootla development in 2009 include drilling 31 gross horizontal wells and construction of compression and gathering infrastructure required to take the additional production to existing processing facilities. Based on information obtained from these wells, Apache expects to achieve significant improvements in both production rate and reserves per well. Apache has a 50 percent interest and operates approximately one-half of its 400,000 gross acreage position in the play.

Development Projects

• Apache continues to target shallow gas, including coal bed methane (CBM), in areas such as Nevis, North Grant Lands and Provost. Intermediate-depth drilling continued in the Kaybob, West 5 and South Grant Land areas of central and southern Alberta.

North Sea

Throughout 2008, the North Sea region invested in drilling and recompleting wells and facility enhancement programs. Key activities include:

Development Projects

• During 2008, we completed 12 new development wells in the Forties field, which flowed at a combined rate of 18,900 b/d.

• Investments in facility upgrades and integrity-related projects over the past five years have significantly reduced platform downtime. Coupled with production from new wells, these improved platform operating efficiencies enabled the region's fourth-quarter 2008 production to reach an average 61,740 b/d. Annual production averaged 59,494 b/d, an 11 percent increase from 2007.

Argentina

During 2008, the Argentina region pursued active drilling and recompletion programs. In total, the region drilled 83 wells, 72 of which were productive. Significant activities include:

Development Projects

• Apache drilled 30 new wells in the Neuquιn basin, with a success rate of 100 percent, and continued to exploit two new plays with an aggressive drilling and recompletion campaign.

Exploration Projects

• In 2008, Apache completed a nearly 2,500 square kilometer 3-D seismic mega shoot in Tierra del Fuego. Twenty-nine wells were drilled in Tierra del Fuego, resulting in a number of new exploration discoveries and field extensions. Notable successes included the completion of the first phase appraisal campaign in the 2008 Secciσn Baρos block and the successful appraisal of La Sara Norte. We also made exploration discoveries at Las Flechas, Secciσn Veintinueve, Camino Real and Perla.

• In the Cuyo basin, Apache was awarded the 4,710 square kilometer CC&B-17 B block adjacent to and along a trend of existing producing fields, which increased our Argentine acreage portfolio by 34 percent.

Chile

• During the third quarter of 2008, we commenced a seismic program on the two exploration blocks acquired in 2008.

Results of Operations

Revenues


                                           Crude Oil       Natural Gas         NGL's           Total
                                                                 (In thousands)

2006 Revenues                             $ 4,911,861      $  3,001,246      $ 161,146      $  8,074,253
. . .